Finances,  Investments

The Challenge of Investing in the Stock Market

One of the major challenges of entering the stock market on a shoestring is brokerage fees. These are fees that you have to pay any time you buy or sell a stock. While there are a number of discount brokerages out there, many of them require that you open an account with anywhere from $500, $1,000, or even more. When you live on minimum wage, saving up that sort of money can be daunting!

Once you open a brokerage account the challenge doesn’t stop there. In order to reap a profit you have to factor in those fees. For instance, the last I checked, a popular Dividend Aristocrat, Proctor and Gamble (PG) was trading at $79.28 a share with a quarterly dividend of $0.717.

Think about this. You work minimum wage. If you’re lucky, you might be able to save up $100 to invest every month or so. That means you will only be able to purchase a single share of the stock at a time. Using my brokerage fee of $6.95 as a guideline, in order to purchase a single share of Proctor and Gamble at $79.28 a person would actually have to spend $86.24 for the privilege. If you were just investing for dividends, it would take you over 27 months just to recoup the fee you paid to buy the stock! I’m not including the potentially increased value of the share itself since appreciation is not guaranteed. In fact, the value of your stock can tank overnight so in reality, when one invests for dividends the safest attitude to have is that you might very well lose the entire price you paid for a stock if the market turns. Even if the market didn’t turn against you, in order to receive a profit from that single share you would have to wait until the stock sold for over $93.19 simply to recoup the amount you paid to buy and sell it!

With that sobering reality, it would be better for the shoestring investor to stash their cash in a savings account.

So how do these big dog investors make money then? They buy in bulk, that’s what they do. It costs the same whether you buy one share or 100 shares so they leverage that to reduce their trading fees to an acceptable level.

Using Proctor and Gamble as an example, if a person bought 100 shares of the company the trading fee works out to seven cents a share to buy, or fourteen cents a share to both buy and sell. The first round of dividends would be $71.70, an amount that completely covers the brokerage fee to purchase the stock and netting a $64.75 profit. Every quarter after that would be pure profit. When the stock increased in price just fourteen cents a share, the brokerage fees would be covered even if you didn’t hold the stock long enough to receive a dividend.

There’s one major problem with that scenario, however. Folks on minimum wage generally don’t have $7,928 to invest at one time. While you can adjust the numbers to accommodate purchasing a smaller amount of shares, one has to be very careful. The goal here is to make a profit–not give it all to the brokerage firms!

My goal here is not to just feather my nest. I want to work out a way that an average person on minimum wage can invest in the stock market and receive a profit. With that in mind I am going to rule out the big dogs as an investment option. While I’m good at saving money I have no desire to save up an entire year’s wage before I could invest.

There has got to be a better way. I have noticed that there are a lot of companies who have seen their stock prices tank starting back in January of this year. I am going to sift through this “bargain bin,” searching for quality companies to invest in. To minimize my trading fees I intend to purchase no less than 50 shares at once, though if at all possible I want to be able to acquire a minimum of 100 shares per purchase.

Is this risky? Yes, it is. I could very well lose every single penny I invest in the stock market using this method but that’s okay. The very worst that can happen is that I have to continue working until I die. Considering the fact that I’d have to do that anyway, the fear doesn’t bother me.

This isn’t the first time I’ve risked everything. When I left my husband, all I had to my name was a ratty old mobile home. I didn’t even have a job when I started but I made it work. I risked it all again when I decided to become a full-time writer. I managed to live on my royalties for several years as a result of that leap.

As for this? This is about more than just me. If I can pull this off, if I can figure out how to play this game and make a profit, I can figure out a way to distil what I’ve learned and teach others how to escape the rat race. I’ll not only achieve my own personal financial freedom, but I’ll be able to help others do it as well.

I’ve got to try.

 

17 Comments

  • Kim

    Hi Annie- you may want to look at opening an account with Vanguard and buying their ETFs (exchange traded funds). They’re a mix of funds like a mutual fund but don’t have the $3k minimum of a mutual fund. You just need enough to buy one share and there’s no fee like when you buy a single stock. And they are way less volatile than single stocks. Good luck!

    • Annie

      As Warren Buffett says “Wall Street is the only place that people drive to in a Rolls Royce to take advice from people who ride the subway.” In short, I don’t trust the people in charge of ETFs or funds to manage my money as well as I can. If I lose money it will be because of my mistake, not because some bone-dead stupid idiot decided to give his drug addicted brother a job so he could support his habit.

      When you add to that the fact that current index funds are heavily weighted with tech stocks and those stocks are about to take a major hit, I feel much safer scrounging around the bargain bins. When the tech stocks finally tank (and they will), the stock market as a whole will drop. I intend to sniff out the bargains and wait until the market recovers. As a result of this I won’t even be considering any sort of ETF or index funds in the foreseeable future. Thanks for your suggestion, though!

  • Carla

    Hiya Annie,

    I was thinking today about your interest in the stock market…
    One or two years ago, I discovered that there was going to be a trading platform that did not charge commission fees called https://robinhood.com/
    It appears to be operational now, but it is not available for Canadians to my knowledge. Have you heard of it?
    When I last looked into it, it appeared that the company launching it was aiming to earn their money from the margin accounts. Not sure if there are any hidden catches….hmmmm.

    • Annie

      Hi Carla! A margin is basically a loan. You pay interest to borrow money from them in order to purchase more shares at one time. Unless you REALLY know what you’re doing, it’s best to avoid margin, because if your stock drops unexpectedly, you can be quickly wiped out. I know day and swing traders (those who hold stocks for a day or two) use margin, but since my holdings are long-term I prefer to avoid using margin. I don’t feel safe incurring any debt if I can avoid it, especially since I am still learning all of this. I’ll have to check into them. Thanks!

      • Carla

        Hi Annie, well said. I wasn’t actually recommending margin investing….rather I was just spouting about Robinhood.com since I find the “no commission fee” concept quite interesting. However, when one ponders how a company could afford to float a stock trading platform with zero commission fees, one has to wonder where they earn their profits. So that’s where the margin trading came in….I presume that is how Robinhood may be earning a profit….( if they are even earning a profit yet…I dunno)

        Back to my main point. Have you heard about Robinhood? And if so, have you heard anything good/bad about it?
        Peace,
        C

        • Annie

          I didn’t believe you were recommending margin trading, Carla. I simply wanted to point out the dangers for those reading these comments who might not understand, especially since margin trading is recommended in so many books about the stock market. I hope you understand.

          As for Robinhood, I haven’t heard anything about them, good or bad. If I do come across something I will let you know, however!

  • Kelly Barrington

    I think you are much better off going with an index fund from vanguard. They are very low cost. but I think you need a minimum of 3,000 to open one. Have you done any research on index funds? There is no picking or choosing just ride the wave.

    • Annie

      Hi Kelly!

      I’ve got the results of my research worked up in an upcoming blog post, actually. It wasn’t a decision I made lightly as you will see when it goes live tomorrow.

  • sam

    Look into company run DRIPs (not brokerage dividend reinvestments. With company run DRIPs, you can buy their stock directly form the company without paying any commission at all. They all have different rules and not all companies offer them. Just do you due diligence.

      • Annie

        Hi Sam!

        I’ve heard about DRIPping and really like it. Right now I’m just planning to save up, purchase 100 shares in dividend-paying stock trading at or near their 52-week lows to sell when they hit their new 52-week high but should I come across a company that I intend to hold for multiple years I definitely plan to see about it.

        My brokerage has offered me DRIPs on the companies I’ve currently invested in, but they actually charge a trading fee each time so I decided against it at the moment. I’ll definitely see if I can bypass that fee when the time is right. Thanks for the tip!