Investing for Students: Getting Started

You may feel that investing money in stocks or bonds is currently beyond your financial capacity. Many students have loans and credit debt to pay off, and therefore do not take the time to create an investment plan. This is unfortunate, because the dividends made from stocks and mutual funds, as well as stock appreciation (i.e., price increase over time), can build up considerable wealth over time. If this money is reinvested, the compounded interest and dividend payouts can increase exponentially.

How can you begin investing in stocks with very little money? Here is a 5 step plan that demonstrates how students with limited financial means can still take advantage of the stock market.

1. Decide what you would like to invest in. This may be the hardest part about investing, but it is worthwhile to consider. Do you wish to own, and track, individual stocks? This requires researching individual companies, poring over their financial statements, and determining if their current stock price is a good buy. Such an approach can pay off quite well if the company stock price appreciates, or if the company pays out a monthly or quarterly dividend. If you do not wish to do a lot of research, you may invest your money in a mutual fund that is managed by a brokerage firm. In this case, you entrust a broker to invest your cash in a range of company stocks. The broker will take a percentage of the mutual fund's earnings and pay out the rest of the money to the fund's investors.

2. Research several online discount brokerage firms. It used to be very difficult to start investing if you did not have significant capital because most investment brokers charged high fees for making stock trades or putting your cash into a mutual fund. Furthermore, investors needed to keep several thousand dollars in their accounts before an investment broker would do business with them. Nowadays, online discount brokers such as TD Waterhouse and Sharebuilder make it easy and affordable to invest with very little initial cash. Many of these online brokers do not even require a minimum balance in your account in order to start trading. Also, discount brokers usually allow investors to make periodic (e.g., $15/month) investments for a small fee.

3. Open a bank account. Most online brokerage firms do business by withdrawing or depositing funds into investors' bank accounts. While you probably could send a monthly check to the brokerage firm when buying stocks or investing in a mutual fund, it will be much easier to simply keep a bank account and provide the bank account number to the firm. In this way, if you specify that $20 per month should be invested in a certain stock, the firm will simply withdraw that amount of money from your bank account and make an automatic investment. Furthermore, if a company you are watching suddenly experiences a drop in its stock price, you will be able to take advantage of that price drop by immediately transferring funds from your bank account to your brokerage account and buying the stock.

4. Set aside some investment money. Although you may have other bills to pay at the moment, don't forget the first rule about accumulating wealth: pay yourself first. It can be $20, $200, or even $5, but money set aside on a regular basis for investment will add up over time. Because you are setting aside that money now, while you are young, you will be able to see it grow over time thanks to compounded interest and reinvested dividends. This puts you at a clear advantage over richer, yet older individuals who no longer have the advantage of time.

5. Invest. Although you may at first be intimidated by buying stock with your hard-earned cash, the only way to get into investing is to actually invest. You may make some mistakes early on, or you may make a significant profit. Fortunately, because you are starting out with a small amount of cash, whatever money you make or lose will not affect your financial circumstances too greatly. Look at this period of time as your chance to take a few risks, make some discoveries, and start building your investment portfolio.