Q: Is there a way to buy a few shares of stock every month without being killed by commissions?
A: Stock commissions have dropped by an incredible amount the past 20 years. Still, they can still chew up a beginning investor's portfolio.
Let's say you open a brokerage account with $500 and plan to buy $100 of stock every month. Even if you start with a brokerage firm that charges a relatively modest $10 a trade, you'll have taken a 7% hit on your portfolio due to the commissions. That's a ridiculously high toll on your account; much larger than some mutual funds charge as an annual fee.
But don't worry. There are options for you:
• Consider an online brokerage geared toward beginning investors who make regular investments. There are several. BuyandHold.com and Sharebuilder.com are two that come to mind.
Buyandhold.com charges $7 a month and then lets you make two trades a month. But since you plan to do just one transaction a month, ING Direct's Sharebuilder is probably a better option. Sharebuilder lets you trade stocks for a $4 commission. And Sharebuilder has another feature you might like; it lets you automatically pull money out of a checking or savings account to regularly invest.
• Think about buying mutual funds. While mutual funds may not be as exciting as individual stocks, in your case, they may be more economical. Most mutual fund companies let you set up accounts with low minimum balances and buy and sell funds for no commission. Some, too, will automatically debit money from a checking or savings account and make investments at regular intervals.
That's not to say that funds are free. They're not. Most collect annual fees that range from 0.1% for the lowest-cost index funds to 2% or more. This is a fund's "expense ratio" and you won't be billed for it, but it comes out of the fund's assets. These fees can eat into your returns, although they are much less than the hit you'd take paying a $10 a trade commission.
• Investigate deep discount brokerage firms. Several online brokerages have taken the lead in pushing commissions below even what the larger firms charge. TradeKing charges $5 a trade, Zecco charges $4.50 and SogoTrade $3. If you're able to work your balance to $25,000 or more, Zecco offers free commissions.
No matter which route you take, you can always switch your account later to another broker. Just be forewarned that nearly all brokerage firms charge a fee to move your account. You can read more here and here about the hidden fees some brokers charge.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz