Tobin Van Ostern | T-VO It: The Blog

By the end of this post you will have bought stock on the stock market at no fee to yourself in just six steps.

People in their teens and twenties spend money at a frenetic rate, few save money and fewer still invest on their own.  However, just taking a small percentage of the spending (whether money is coming from parents, work, gifts, etc…) and investing it will reap tremendous dividends later on in life.  I would argue that young people are unlikely to invest (unless their parents do it for them) not because of lack of interest -indeed, I’ve had numerous friends ask me how to get started- but because it simply isn’t that easy to figure out how to get started.

Time is the single most important part of investing, and the younger you are the richer you are in that resource.  I am going to explain why this is and how you can get started investing, literally today, with just $100.

1.  Make The Decision To Investing Today

If you’re reading this, you probably already have the interest in investing.  You can start with whatever you feel comfortable with, $100, $250, $1000, it’s really up to you.  You simply do not need a lot of money to get started.

Let’s say you have $100 sitting in a checking or savings account.  It’s good to make sure you have enough money saved, so decide for yourself if there’s a time in the next 90 days when you would desperately need the $100.  If not, go ahead and get started.

Let me show you two different scenarios that illustrate why it is so important to start young.
Scenario 1: Let’s say you decide that every year you are going to invest $1000 ($83.33/month, $2.70/day) from now (20 years old) to when you want to retire (age 65).  If you do that, at the annual S&P’s return of 11%/year that means that your account will be worth $1,095,169.  Considering you spent $45,000 overall that’s a return of over 2400%.
Scenario 2: This time, you wait until you’re 40 years old, and then start investing $4,000/year until age 65.  At the same rate of annual return, your account would only be worth $507,995.   This is less than half of option one even though you contributed $100,000 (over twice what you spent in Scenario 1).  This doesn’t factor in taxes (which I will address later) but the disparity in return would be the same.  Why is this the case?  The answer is because of the amazing system of compounding.  If you contributed $1,000 in Year One and earned $110 in interest then Year Two you’re earning 11% interest not on $2,000 but on $2,110.  This means that during year two you actually earn $232.10 in interest.  Thus, in year three, you’re earning interest on $3,342.10 instead of just $3,000.  This effect keeps increasing the longer you have to invest.

2.  Open An Investment Account

Now that you’ve decided to get started, how do you actually go about investing?  Personally, I would recommend investing through a Roth IRA account.  IRA’s are Individual Retirement Accounts but their real effect is that you avoid paying some taxes on your investments that you would otherwise.  Under Roth, you avoid paying taxes on any earnings and only pay taxes on contributions.  A Traditional IRA is the opposite (you pay taxes on earnings but not on contributions).  At this age, a Roth IRA is without a doubt the way to go.  Plus, with Roth IRA’s, you’re allowed to withdraw contributions at any time without any penalty (though you cannot withdraw earnings/interest until you retire…with some exceptions for home purchases and higher education expenses).  I’ll do a post on IRA’s at a later point, but that’s all you should need to know for now.

I recommend that you use E*Trade.  E*Trade has SIPC protection (investments up to $500,000 just like FDIC for banks) and can, if used correctly, actually have no fees.  There are plenty of other options like Schwab and ShareBuilder but I have found E*Trade to be the best.

Go ahead and open the account, there are no fees to do so, and you can set up a Quick Transfer from your bank account to your new Roth IRA account.  (I’ll go over E*Trade and its savings accounts in more detail in another post).  For now, transfer that $100 into your Roth IRA Account.

3.  Buy Mutual Funds

Now that you have the money, hold your horses a second before rushing out and buying a stock.  First off, whenever you buy a stock you pay a fee.  If you’re investing only $100, then that stock purchase fee of $13 is going to be 13% of your entire purchase.  Far too high to turn you a profit anytime soon.  Furthermore, then you’re pinning the entire future of your portfolio on one stock.  Stocks are fine to purchase, and I’ll cover that at a later point, but for now that is not what you want to do.

Instead, take a look at No-Load, No-Transaction Fee Funds.  These funds will not cost you a single penny to purchase and the only fees you will be incurring will be the ones built into the actual fund.  You can then modify your search criteria on E-Trade to only include funds with an initial purchase fee of under $500 for IRA’s.  Plenty of funds have a zero start minimum for IRA’s which enable you to split your purchase into $50 for one fund and $50 for another.  Otherwise, common thresholds are $200 and $250.

I would also recommend only funds that have a relatively high MorningStar rating (4-5 stars) since this is your first purchase.  An index mutual fund basically takes your $100 and invests it in dozens of different companies.  Thus, if one company sinks your stock won’t go down too far.  Most funds have a certain theme such as energy or foreign investments or small businesses, etc…  This is a good time to pick out a dozen funds and look into them, look at their history, think about what they invest in, and see if one of them stands out for you.  I can go into how to pick a good fund at a later point but generally you can get a good sense of what is logical.  For example, I invested in Jennison Natural Resources Z (PNRZX) a little ways back.  I’m not sure how long I am going to hold onto this fund, but I’ve had a return of around 20% on my initial purchase of the fund roughly one year ago.

Once you’ve picked a fund or funds, purchase them.  Keep in mind that on E*Trade you can’t sell a fund that requires no fee to purchase for either 90 or 120 days without incurring a $50 fee.  I always recommend buying long-term (with more than a year in mind at minimum) so that has never been a problem for me but is worth keeping in mind.

4.  Reinvest and Keep Investing

Some of the funds you buy may return a dividend, just choose to have those automatically reinvested in order for the effect of compounding to keep working.  Additionally, keep trying to put another $50 or $100 away every month or so.  I recommend diversifying between a couple different funds but you shouldn’t need more than 2-4 at this point.

5.  Buy Low, Sell High

This is one of the most well-known concepts of investing and also the hardest to follow.  Though it logically makes sense, when people actually see their stock price dropping they want to sell it and when it does well they want to buy more.  First, I would recommend not checking your stock prices every day but since I know that’s hard not to do (especially in the early stages) I would also recommend you follow the simple Buy Low Sell High Strategy.

If you think your fund is good, but it went down recently, it may be undervalued and you should buy more of it.  The past few months are really the perfect investing time as the market is getting hammered, no one knows when the bad economic news will end.  However, it’s safe to gaurantee that within a year or two our economy will have improved and almost all these stocks will have rebounded.

For Example: With the PNRZX fund I mentioned earlier.  After I purchased it just one month later it sunk to $51.64 from its original purchase price of $59.66.  Rather than panicking and selling it at the time (like I was tempted to do), I reminded myself that the market as a whole was taking a beating and that the reasons I bought the stock were still there.  This fund invests in Natural Resources with a focus on Oil and Energy Companies.  I looked to the future and figured that if anything, the demand for such commodites was going to increase.  Thus, I went ahead and purchased more of the stock.  Today, that stock has bounced back and my initial purchase has given me a profit of 20%.  However, that secondary purchase I made at the $51.64 price has instead turned a profit of an incredible 39%!  This simple principle can be applied extremely effectively.  Just focus on why you purchase a fund, and see if those reasons still seem sound or not.

6.  Keep Researching & Diversify

This is naturally a broad topic and my goal for this post was to enable you to literal put $100 on the stock market today by way of an index fund at absolutely no outside fee to yourself.  There are a huge number of related topics such as investing strategies, what IRA’s are, more about E-Trade, etc.., that I am sure you are interested in and I will be happy to write about for later posts.  For the time being however, feel free to post a comment with any questions about these Six Steps, dont’ put all your eggs in one basket and try to spread out to a couple decent funds over the next month or two.  We’re in a rocky economic period right now and you should avoid freaking out if the stock rises one day and plunges the rest, just leave it in for the long run.