Investing 101: Updated and Expanded

Chapter 13. STARTING SMALL

Think you're too poor to invest in stocks? Many people do, partly because they know that most brokerage firms and mutual funds require at least $1,000 or $2,000 to even open an account. However, there are several ways that you can get started with as little as $25 to $50 a month. Better yet, new opportunities are arising daily, thanks to cheap online trading services, which are increasingly accommodating to individual investors who don't have a lot of cash.

Two Web-based brokerages, for instance—found at www.sharebuilder.com and buyandhold.com—allow investors to buy individual stocks with no investment minimums and at a minimal cost. Both of the companies encourage a strategy called dollar-cost averaging, which is one of the most successful, time-proven strategies on Wall Street.

Dollar-cost averaging works like this: You decide to invest a set amount in a particular security each month, every month. You set it up in advance and, aside from funding the purchases with either a deposit or an automatic transfer from your bank account, you forget about it. You don't watch stock prices. You don't trade quickly when the market is rising or falling. You let the company trade for you, based on the schedule you've prearranged, no matter what.

The reason dollar-cost averaging works is that it takes the emotion out of investing, and it naturally enforces age-old market wisdom— buy low, sell high. Let's say you choose to buy $100 in XYZ stock each month. In month one, ...