The Finance Professor: Investments for Grads

Editor's note: In this installment of "The Finance Professor," Scott Rothbort answers a few reader questions.

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I would like to provide an investment as a high school graduation gift to a friend of mine. I like Vanguard, but don't really want to commit to its high minimums. Can you offer a mutual fund and/or stock(s) that would be good for a smart high school grad, so they can understand the value of investing, compounding, etc.? -- Lynne F.

I have two suggestions: A DRIP and an ETF.

First, look for a solid stock with a DRIP, or Dividend Reinvestment Plan , which will give the graduate the opportunity to not only reinvest dividends , but to make periodic incremental investments at a low cost. I described this investment technique in "Life Lessons for Aspiring Millionaires" and in a follow-up segment on TheStreet.com TV.

Second, consider buying an ETF, or exchange-traded fund . I would start with the S&P 500 SPDRs (SPY Quote) or even the leveraged version, the Ultra S&P 500 ProShares (SSO Quote). SSO, while more risky, looks like it will provide greater long-term returns and help the holder develop a sense of patience.

Both of these investment alternatives can be bought for a fraction of what a mutual fund would require as a minimum.

(To learn more about ETFs, visit the TheStreet.com's ETF Center.)

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Is "beta" another measure of volatility? -- Rick G.

Volatility and beta seem to be similar but are indeed different. Volatility refers to the rate at which a stock will move relative to itself over a long period of time. Beta is a measure of how a stock will move relative to an index over a long period of time. I touched on beta in "Understanding Risk." Beta is also contained in our glossary of investment terms.

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