For a newbie who wants to invest in stocks, the idea can be intimidating. If you don’t have thousands of dollars to put into stocks, it can seem like a fruitless lesson in how the U.S. economy works.
After all, if you only have a few hundred dollars to buy a few shares — or even one share — of a particular stock, what’s the point? Shares of Apple sell at about $500, so owning one share may not get you very far.
But at least it’s a start, right? To invest in stocks you don’t have to have thousands of dollars to get started. For a few hundred dollars you can get in the stock market and hopefully see your money grow over time. That’s one key to investing in stocks — having the patience to hold onto them for years while they increase in value and pay dividends.
Here are five ways to invest in stocks without having to have a lot of upfront cash:
1. Direct stock purchase plan
Also called a DSPP, a direct stock purchase plan allows people to invest in stocks by buying a stock directly from the company you want to invest in, or through its transfer agent.
A major benefit is avoiding commissions because you’re not buying through brokers. You may have to make an initial investment of $100 to $500, but that can sometimes be waived if you agree to automatic monthly withdrawals from your bank account.
2. DRIPs to invest in stocks
A dividend reinvestment plan, or DRIP, can also be bought directly from the company you want to invest in, and allows investments of as little as $10 or $25 to buy fractional shares. So if a stock trades at $100 per share, and you only have $50 to contribute one month, you can buy half a share. A broker won’t let you do that.
To join a DRIP, you’ll have to own at least one share of the company’s stock. Some companies will let investors buy one share through their reinvestment agent. A minimum initial purchase amount may also be needed to join. You can also buy one share through a company such as One Share.
But after you’ve met those requirements, you can buy partial or full shares at any time. The dividends are automatically reinvested in the stock, so every year you may get an extra share without doing anything.
Search for DRIPs on the investor relations website of the company you want to invest in, or look for directories of DRIPs.
3. Small investments with a broker
Some brokers allow customers to invest in stocks through automatic investment plans that cost a few dollars to join and may have transaction and other fees.
ING Direct’s ShareBuilder allows investments to be scheduled on a weekly or monthly basis. Customers can also invest any dollar amount on Tuesdays online.
Fidelity and other large investment companies also have automatic investment plans, though you may be limited to investing in mutual funds.
An Exchange Trade Fund, or ETF, can help an investor diversify without having the high initial deposit that some mutual funds require. ETFs trade like stocks at a specific price. They track an index, commodity or group of assets like an index fund, offering instant diversification.
Shares must be bought as whole shares, and you’ll typically pay a broker’s commission to make a trade. But if you can save your money and invest slightly larger amounts less frequently, ETFs can have low transaction costs.
5. No-load funds
Another way to invest in stocks is through a mutual fund that will have a variety of stocks. If you buy a mutual fund through a broker, you’ll usually pay a front-end load. That’s a commission of around 5%, which is paid when the fund is first bought or when it’s sold. A fund balance may also be charged an annual fee.
A no-load fund is one way to invest in stocks without paying such fees. They don’t require a commission or sales charge. However, some no-load funds require a large minimum investment such as $3,000 that can take a new investor a year to accumulate.
Search for investment companies and brokers that offer no-load funds at minimal investments, such as $100. Some have no investment minimum if you buy their funds.
Those are some ways to invest in stocks without having a lot of upfront money. What methods have you used to invest in stocks? Tell us in the comments section below.