A portfolio can be built on the low-budget plan

Tools: Stocks, mutual funds, 401 (k)s, investment clubs, discount brokers, the Internet. All are available for use in the individual's journey to personal wealth.

Dollars & Sense

October 28, 2001|By Ted Shelsby | Ted Shelsby,SUN STAFF

You don't have to be rich to play with the rich on Wall Street.

"One of the greatest developments of finance in recent years is the emergence of a variety of investment vehicles that allow people to make investments for small amounts of money," said Charles Carlson, chief executive of Horizon Investment Services in Hammond, Ind., and editor of a newsletter for investors.

"There are mutual funds that allow someone to come in with as little as a $50 investment," he said. "There are company 401(k) plans that allow workers to invest as little as 1 percent of their weekly paycheck. A worker earning $500 a week can invest as little as $5 in the plan."

Also, Carlson said, dividend reinvestment plans are growing in popularity, and an increasing number of companies bypass the brokerage system and sell their shares directly to the public.

There are other ways that penny pinchers can enter the market.

"One of the lowest-cost ways of investing is through index-based mutual funds, such as those based on the S&P 500," according to Seth Hammer, an associate professor of accounting at Towson University.

He said the management fees for such funds are low and the savings are passed on to the investor.

Hammer said the management fee for an index fund might be 0.2 percent, compared with a typical management fee of 1.5 percent. "It may not sound like much," he said, "but over the years a 1.5 percent fee can be significant."

Hammer said discount brokers can work for those investors who have made up their minds which stock they want to buy and only need someplace to place the order.

"If you don't need advice," he said, "there is no reason not to use a discount brokerage company." He cautioned, however: "Make sure the discount brokerage company has been in business a few years."

E-trading, he said, is another way to cut costs. "You can do an e-trade for $8, whereas a broker might charge $100 or $150 to execute the same trade. Again, if you know the stock, this may be the way to go."

Those wishing to buy stock in the company for which they work can often avoid a commission and even receive a discount "of 5, 10 or even 15 percent," said Kevin Condon, of financial planning director at Baltimore Washington Financial Advisors in Ellicott City.

Carlson said, "There are online brokerage services, like BuyandHold, that allow people to invest as little as $20 at a time to buy a share, or even a fraction of a share of stock. It makes it a lot easier for the little guy to get into the market. Instead of investing only in companies with low share prices that they can afford to buy, this allows people with only a little money to invest in quality companies."

Carlson said there are two pricing schedules for the online service. Under the first, investors pay $6.99 a month. Under this arrangement, the first two trades each month are free, and there is a charge of $2.99 for each additional trade.

The cost of the second plan is $14.99 a month. It provides unlimited trading.

Carlson said more and more companies, including a number of Fortune 500 firms, sell their stock directly to the public. "They do it for a number of reasons," he said. "They like to have individual investors. Individuals tend to be long-term investors. They usually don't jump in and out of a stock as quickly as the institutional investors."

He said it is also a way for a company to get a consumer involved with its products. "If you have stock in McDonald's," he said, "it is more likely that you are going to buy a Big Mac instead of another fast-food sandwich."

According to Carlson, more than 600 U.S. companies sell their shares directly to the public. They include such giants as General Electric Co., Eastman Kodak Co. and American Express Co. "Some companies," he said, "don't charge any commission on the sale of their stock. Others do, but the fees are generally only about $5."

With most companies, he said, the minimum initial investment is $250. Subsequent investments can be made for as little as $50 to $100.

Hammer, the Towson University professor, suggests that investors on a budget not overlook U.S. savings bonds. "I-bonds are an excellent investment," he said. "But most brokers don't recommend them because there is no commission involved. You can buy them at any bank."

He explained that the I-bonds are guaranteed to keep up with inflation. The interest is not taxable until the bond is redeemed. They are free of city and state taxes.

Another way of cutting the cost of investing is to share the expense with your friends and neighbors, said Jonathan Strong, manager of membership at the National Association of Investors Corp., the Royal Oak, Mich.-based nonprofit educational organization.

"Start an investment club," he said. "Share the brokerage account and other fees with the other members of the club. The savings can be substantial."

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