201 Investing: how to find the best low-cost methods for buying stocks and mutual funds - Investing Part 2 Of A Series - Statistical Data Included

Black Enterprise, Dec, 2001 by Matthew S. Scott, Christine Albano

WHILE THE STOCK MARKET WAS GOING ON ONE OF THE longest bull market runs in history during the 1990s, Edward Love was learning as much as he could about investing. The 36-year-old Bessemer, Alabama, production worker started with a mutual fund 10 years ago, but in 1999 a friend introduced him to online investing, and within a year, he was hooked. Online investing opened up a new world where financial information was a mouse-click away, any time, day or night. By studying many of the online investing Websites, he now feels so confident about his knowledge of the markets, he uses his laptop to do his own research and stock trades.

Love also discovered a number of ways to purchase stocks at a lower cost than major Wall Street firms charge. Because of his modest income, investing online immediately appealed to him. And it made financial sense, too.

"Your profit margin is better when you can invest on your own," says Love, who has opened several online accounts as well as enrolled in a direct stock purchasing plan in order to save money.

If you want to save money while you invest, commit to a strategy of investing small sums on a regular basis with investment companies that allow you to make transactions at lower cost. It's a great way for beginning investors to get started and get the most value for their hard-earned dollars. You will have to investigate brokerage companies as well as publicly traded companies you'll invest in. Others have done it. Why haven't you? Whether you have a lot of money or a little, over the long haul, you can reap the benefits of low-cost investing. But you have to get started.

DOLLAR-COST AVERAGING

Whether you know it or not, you may already be engaging in low-cost investing through your 401(k) or 403(b) plan. Anyone participating in these qualified defined-contribution retirement plans is making regular pretax contributions (of up to $10,500 annually for 2001, $11,000 for 2002). Some companies match employee contributions up to 100%, and the funds can be invested in several options, usually a choice of mutual funds, a money market fund, and company stock. Once you've made your selections, your money is invested at regular intervals-virtually at no cost to you.

Investing a fixed dollar amount in the same security over a period of time is known as dollar-cost averaging, and this strategy can be implemented with 401(k)s, individual retirement accounts (IBAs), or investment accounts for purposes other than retirement. An IRA is a personal, tax-deferred individual retirement account that allows employed people to contribute up to $2,000 a year ($3,000 in 2002) toward their retirement. Most financial services companies can arrange for a set dollar amount to be transferred directly from your checking account or after-tax payroll check to your IBA to take advantage of dollar-cost averaging.

Baunita Greer, president of Cromwell, Miller & Greer, in New York, a division of the security brokerage firm B. Pierce & Co., says any good investment plan should start with participation in your company's 401(k) plan or with IRAs before actually buying individual stocks or additional mutual fund shares. "Investors should not feel they are going to get rich overnight," says Green "It could take years."

ONLINE INVESTING

Love, who describes himself as "everyday people," knows it's going to take many years before he reaches his extraordinary goals. Last January he established B.I.G. Inc. (B.I.G. stands for Best Investment Group), an investment club that he hopes will become a family trust fund. "We're looking to create [a legacy], just like with the Kennedys," he says with a laugh.

He and Roland have taken the first steps toward establishing the Love family trust fund by opening an online account for B.I.G. Inc. They opened the account with Sharebuilder (www.sharebuilder.com) in March, and they each contribute $250 every quarter. So far, they've invested in Exxon (NYSE: XOM), Philip Morris (NYSE: MO), Anheuser Busch (NYSE: BUD), and HealthSouth (NYSE: HRC).

Love believes this was the best approach to building wealth for his family because it allows any family member to participate no matter what their financial situation, and it is inexpensive to maintain the account. "You're talking about minimum amounts of money to invest instead of dropping down thousands of dollars at a time," he explains, "and it's all for just three dollars a trade."

At Sharebuilder (which can be accessed through www.blackenterprise.com), investors can set up online accounts with no minimum required, and use dollar-cost averaging to purchase stocks and mutual fund shares. The site also provides financial education, online tools and interactive calculators, research, and long-term investing strategies with an emphasis on diversification (see sidebar "Low-Cost Investing Resources to Help You Get Started").

DISCOUNT VS. FULL-SERVICE BROKERS

Robert A. States, a registered representative and tax preparer for Fiducial Inc., advocates working with a broker as opposed to online investing since the market's complexities might be too overwhelming for some people. "There is a high degree of people losing money, and there's a danger you could lose big time if you are not exactly careful of what you are doing," he says.