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Investing on a Budget: How to Get Started in the Stock Market without a lot of Money

by Jason Dean 


stock watchIn the not-so-distant past, stock trades cost $50 or more. Then Charles Schwab introduced the concept of “discount brokerage,” which forced the big brokers on Wall Street to lower their prices. Finally, the Internet made trading much easier and less expensive, and online brokers like E-Trade and Ameritrade competed to deliver even lower prices.

But would you believe you can now trade stocks for $0?

That’s right, zecco.com has been offering $0 trades for months — but just recently, they dropped the $2,500 account minimum, meaning that now you can open an account with as little as $50 (or less)!

So what’s the catch? Well, you’re limited to ten trades a day and forty per month — after that, trades are $3.50 (which is still a very low price). But more importantly, zecco is an ultra-discount broker — you will not be able to rely on professional assistance when making your trades. Price is not the only thing to consider, as Barron’s magazine rated OptionsXpress the top online discount broker, even though it charges $14.95 for trades, which is well above the industry average. If customer service is important to you, zecco may not be your best choice.

However, if you are trading on a budget, high commissions can really cut into your profits. For example, if your online broker charges you $10 for commission, and you buy ten shares of a $50 stock, your total cost is $510. If the stock goes up by 10% to $55 per share, you can sell your shares for $550, but you have to pay another $10 commission for the sale as well, reducing your net proceeds to $540. Instead of buying for $500 and selling for $550 (a $50 or 10% profit), you’ve bought for $510 and sold for $540 (a $30 or only 6% profit). This means 40% of your profits have been eaten up by commissions — yikes!

But if you’re not ready to start trading any real money right now, that doesn’t mean you can’t get started in the stock market. In the past year or so, several “social networking” sites for aspiring stock traders have sprung up all over the Web. These sites work like MySpace, but in addition to making “friends,” you can buy and sell stocks with fantasy money — it’s a lot of fun, even for real-life investors.

Some of the best social-networking / fantasy investing Web sites are listed below:

Stock-market investing is not for everyone — some people are better off buying mutual funds or exchange-traded index funds. But one of the knocks against self-directed stock-investing has always been the commissions. Now with $0 trades, that’s no longer a factor, and everyone with the inclination to make a buck on Wall Street can do so irrespective of their financial status.

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Comments

2 Responses to “Investing on a Budget: How to Get Started in the Stock Market without a lot of Money”

  1. Zachary on July 7th, 2007 1:37 am

    I’m an ETF man myself.

  2. Jason Dean on July 7th, 2007 2:11 am

    Great looking blog, Zachary.

    Of course, since ETFs trade like stocks, zecco.com can be good for ETF investors as well as traditional stock investors.

    Do you use an online broker? If so, which one? I have accounts with AmeriTrade (IRA) and OptionsXpress. I’m going to open a zecco account ASAP, though.

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