Choosing an Online Broker
The Motley Fool has a decent article describing the best places to invest if you have an extra $20, $100, or $1,000 lying around. I think the article is good because it gets people thinking about investing incrementally. It's easy to invest if you already have gobs of money in your pocket. It's much harder when you are starting with a pair of Hamiltons in your wallet.
The article operates under the assumption you have paid off all your high interest debt from credit cards and other not-so-favorable investments.
- If you have $20: The Fool says to consider investing in a DRP (a plan some large companies have allowing employees to purchase stock). That is good advice, but for those of us not working at a fortune 1000 company where else could that $20 be put to work? Regular visitors to the site know I'm a big fan of high yield online savings accounts. They won't make you rich, but are flexible, a good value, and generally have no minimums.
- If you have $100: The Fool says to consider investing in an index fund. The rub on this type of investment is that you may have that investment chewed up by broker fees. If you get charged $10 to buy the fund, then another $10 a year until your account meets the brokerage minimum, you will have to make more than 11% per year (on the $90 invested after commission) just to stay even. Again I think $100 is better spent in a high yield savings unless you already have a brokerage account up and running. In that case the index fund can start to make more sense.
- If you have $1,000: Here you have more options. The Fool says a good option is a discount brokerage account charging less in commission than 2% of portfolio value. I think another excellent option is a Roth IRA account. There are plenty of fund families that are no load and if you couple that Roth investment with additional funds each year until retirement you will have a nice little next egg when you turn 65.
