Despite the inexpensive access to financial markets and research available to today’s investors, or perhaps because of it, getting started can be daunting for do-it-yourselfers of modest means.
But there are number of simple ways for novices to begin building a portfolio without much cash in some of the market’s biggest names. From buying fractional shares to investing through a direct stock purchase plan, investors can begin slowly growing their retirement savings with little cash.
Here, some ways to kickstart your savings with modest investments:
Fractional Shares
Many beginning investors understandably want to partake in the gains being enjoyed by the most popular companies. But with shares of hot names like Tesla (ticker: TSLA), Shopify (SHOP), and Amazon.com (AMZN) trading in the hundreds or thousands of dollars, it can seem a challenge to start a position.
“It’s a struggle for investors that we hear about all the time,” says Liz Young, director of market strategy at BNY Mellon Investment Management. The good news is that there are now a lot of low- to no-commission brokerage options for investors, says Young.
Buying fractional shares, or slices of stocks rather than entire shares—say $200 of Amazon, for example—is one way to begin investing cheaply. Online stock brokers, investment apps, and robo-advisors increasingly permit investors to buy fractional shares of companies and exchange-traded funds, and many offer such trades commission-free.
Some of the ways to buy fractional shares: Schwab Stock Slices, launched in June, allows investors to buy partial shares of any company in the S&P 500 for as little as $5. Robinhood permits investors to buy as little as $1 of many of the stocks traded on its platform as well as some ETFs; Fidelity offers Stocks by the Slice, which lets investors buy portions of stocks and ETFs for as little as $1.
Fractional shares “have really democratized investing for a huge group of people,” says Brian Walsh, a certified financial planner who leads the financial planning team at Social Financial, a financial-technology company in San Francisco. “They give new or experienced investors the flexibility and control to invest based on a dollar amount.”
And they allow those who might otherwise delay investing or concentrate their holdings in stocks they can afford to begin investing earlier and to diversify with multiple securities, Walsh says.
“It really does benefit an investor who has $100 or a few hundred to invest,” says Jeff Mattonelli, a financial advisor at Van Leeuwen & Co., a Princeton, N.J., wealth manager. Rather than buying one share of a stock trading at around $100, a young investor could diversify $100 among 10 stocks by buying fractional shares, he says.
Direct Purchases
Many publicly traded U.S. and international companies have programs that permit investors to buy stocks directly through a company or its transfer agent rather than through a brokerage account.
“The old days when people used to hold a stock certificate have gone away, but some people like to buy directly from the company,” says Sheila Frierson, president of North America employee share plans at Computershare, which administers the plans for more than 1,000 U.S. companies. “A lot of younger people don’t necessarily have relationships with brokerages.”
Buying directly from a company through its stock purchase plan is effective for investors who want to own one specific company over a long period of time, Mattonelli adds.
Direct stock purchase plans generally permit investors to sign up online or by mail, and to buy fractional shares.
Fees for the plans vary, and a minimum initial investment is usually required so it pays to check before assuming that a direct purchase plan is less expensive than purchasing shares through a low-cost brokerage. Home Depot’s (HD) direct stock purchase plan, for example, requires a minimum initial investment of $500 and investors may invest up to $250,000 a year through the plan.
Investors can continue saving by having at least $50 automatically deducted from their bank account monthly or purchasing by check as often as once a week. For each transaction, there is a small service charge plus a pro rata amount of brokerage commission—generally 5 cents per share for a purchase and 15 cents per share for a sale. Those who already own Home Depot shares may reinvest their dividends and buy more shares.
Dividend Reinvestments
One of the most effortless ways for investors to build their savings is to set up a dividend reinvestment plan, which automatically invests dividends paid out by a company to buy additional shares. Individuals can sign up for DRIPs by mail or online through the transfer agent of the company in which they hold a stake. Information on the plans may generally be found on the websites of dividend-paying companies.
Some plans permit an investor to reinvest just a portion of their dividend, and receive the rest of the payment in cash, says Chuck Carlson, editor of DRIP Investor newsletter. The newsletter, which is aimed at do-it-yourself investors, tracks about 900 U.S. companies and more than 200 foreign companies with American depositary receipts trading on U.S. exchanges that offer DRIPs.
Some DRIPs charge a small fee to reinvest dividends—the average fee is $2.50 per dividend payout—while others allow reinvestments at no charge, says Daniel Douglas, who manages plan administration at AST, an ownership data management and analytics firm.
Investors may also reinvest the dividends paid by stocks they own through a brokerage. Charges will depend on several factors, including the type of brokerage account. Once the reinvestments are started, the plan will “automatically buy fractional shares of that same security, so it’s just a way to build your position,” says Young.
Write to us at retirement@barrons.com
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