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OTTAWA (GlobeinvestorGOLD)—Buy mutual funds, young investor.
That's the conventional wisdom for newcomers to investing, and there's no question it's a perfectly sound approach. But what if you want to buy stocks to complement or even replace funds? Despite what you may have heard, it's easy and relatively economical for rookies without a lot of money to buy stocks.
Maybe the biggest misconception about investing directly in stocks is that you have to buy in big blocks. That's flat out wrong. You can buy a single share of a company if you want, or any other number. A second fallacy is that the commissions are prohibitively expensive. In fact, you can buy shares for as little as $24 to $30 per trade at an on-line broker. Full-service brokers can do the job as well, but they charge much higher commissions as compensation for the work they do in helping you develop an investing plan and select stocks, funds, bonds and so on.
Another way to buy stocks on the cheap is to use the low-cost investing service offered by the Canadian Shareowners Association. This educational organization is able to buy and sell stocks on behalf of members through its Canadian ShareOwner Investments Inc. division. Orders are pooled together and executed on a weekly or monthly basis, which allows for cut-rate commissions. You can make a onetime lump-sum purchase for $14 plus between 3 and 6 cents a share, or you can make regular purchases every one, two or three months for $6 a pop, plus a small per-share fee (there may also be small processing commissions for some transactions).
The CSA offers a limited menu of Canadian and U.S. stocks and exchange-traded funds (index funds that trade like a stock), but it's a premium list that has been screened for quality according to the association's own criteria. One of the most appealing things about the CSA's brokerage service is that you can hold fractional shares. So if you have $250 to invest in a $35 stock, you'll be able to buy 7.1428 shares (yes, they calculate to the fourth decimals). If these shares pay a dividend, the CSA will reinvest them for you to buy you new shares at no charge.
Dividend reinvestment plans (DRIPs) like these are also available through on-line brokers—they may change fees, so be sure to enquire—and also from some companies directly from their investor relations departments. The general principal is the same: Your dividend payments are used to buy new shares with either no brokerage fees or only a nominal charge. You'll find a handy listing of companies with DRIPs on the Stingy Investor Web site. Note that a few companies will allow you to buy fractional shares, but most won't.
If you like the idea of using an on-line broker to buy shares and submitting your buy and sell orders over the Internet, you should be aware that you may be subject to account maintenance or inactivity fees if you have less than $5,000 in an unregistered account. Registered retirement savings plan accounts are usually exempt from such fees. The advantage that offsets these nuisance fees is trading at a very reasonable cost. At the low end of the scale are eNorthern at $24 and CIBC Investor's Edge at $25. A few other brokers have $25 market orders (where you pay the going market rate for a stock), but they charge $29 for limit orders (where you put a ceiling on what you're willing to pay).
The clear advantages that mutual funds have over stocks are diversification and professional money management. These benefits aren't to be scoffed at if you're an investing novice.
Still, the rewards of buying stocks directly can be considerable, and we're not talking here about penny mining stocks or promising biotechnology plays. Shares of grocery giant Loblaw Cos. have risen to $62.50 or so from a split-adjusted $6.87 in the past 10 years, a compound average annual return of about 24.7 per cent.
Young investor, there's some food for thought.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.