|Gimme Five Bucks' Worth of Cisco |
You can buy stocks in dollar amounts, rather than in whole shares, through these online brokers.
|Site||Minimum investment||Cost||Trading frequency||Additional fees||Stocks available|
| ||$20 per stock||$2.99 per trade||Twice a day||None||1,400|
| ||None||$2-$5 to buy; $19.99 to sell||Every Tuesday||$19.95 for real-time trades||2,000 plus exchange-traded funds|
| ||None||$295 annual flat rate||Twice a day||$14.95 for real-time trades||2,500|
|*Expected to launch in April. Source: Companies.|
It's not easy to squirrel away a little dough in some stocks. The minimum initial investment for a mutual fund averages $3,370, up more than $700 from three years ago, Morningstar reports. And 100 shares of popular Internet highfliers like Yahoo! ( YHOO) ($177 per share at Wednesday's close) and eBay ( EBAY) ($199) can run five figures. What if you just want to put 20 bucks to work? Now there are at least two online brokers, Buyandhold.com and Sharebuilder.com, that will let investors build a diversified portfolio using small change to buy fractional shares of stock. A third service, Foliofn, will launch within a month. Foliofn will also offer fractional share investments, but it's aimed at high-dollar investors. For as little as $20 and a couple of bucks a trade, Buyandhold.com and Sharebuilder.com offer the chance to put together a customized portfolio. The concept is similar to
dividend reinvestment plans or direct stock-purchase plans, in which investors buy stock directly from a company and then put dividends back into fractional shares. But there's a key difference: Many of today's stock-market darlings, like JDS Uniphase ( JDSU) and Qualcomm ( QCOM), have never heard of dividends, much less anything as old school as dividend reinvestment. What's more, it's impossible to buy those stocks directly from the companies, even though investors are clamoring for them. By bundling together thousands of investors wanting a piece of Microsoft ( MSFT) or Cisco ( CSCO), the services can keep trading costs down and allocate partial shares to individual customers.
A key component to keeping costs down is limiting trading to set times. Buyandhold.com trades twice a day (as will Foliofn when it launches). Sharebuilder.com does its trading once a week. These services aren't for active or short-term traders. But "people are willing to trade
lower commission fees for lack of precise trading," says Charles Carlson, publisher of the DRIP Newsletter and co-portfolio manager of the ( SDOWX) Strong Dow 30 Value fund. He's also an investor in Buyandhold.com and a member of its board of directors. For the buy-and-hold investor, these services offer direct ownership of stocks without the layer of fees imposed by mutual funds. For domestic stock funds, these fees average 1.44% of assets annually, according to Morningstar. "People don't know how expensive mutual funds are," says Steve Wallman, chairman and chief executive of Foliofn. And he should know. He used to be a member of the Securities and Exchange Commission, which regulates the mutual fund industry. But Sharebuilder.com and Buyandhold.com only charge per transaction, so investors who avoid frequent trading can pay less over the long term than they would buying mutual fund shares. And at a cost of $2-$5 for most trades, they also undercut the traditional brokers. "We're going to do to the online brokers what the online brokers did to the bricks-and-mortar brokers in the '90s," boasts Peter Breen, president of Buyandhold.com. Not everyone sees it that way. Avi Nachmany, president of fund tracker Strategic Insight, believes investors of limited means will feel more comfortable owning mutual funds than stocks. "Mutual funds clients are at the core people who want someone to do the stock picking for them," he says. Still, there are indications that investors don't fall neatly into any of these categories. More than 80% of Sharebuilder.com's customers have accounts with other online brokerages, says its CEO Jeff Seely, indicating they use one type of account to trade and another for long-term investing or savings. Here's a detailed look at each of the three services: dollar-cost-averaging investor market. Although there's no minimum investment, the $295 annual fee makes it impractical to invest just what's in the piggy bank. Foliofn customers will be able to build their own customized portfolios or invest in any of about 75 created by Foliofn, which contain 20-50 stocks each. Some replicate the stodgy Dow Jones Industrial Average, while others buy Internet stocks or environmentally friendly companies. Investors will be able to customize these preset baskets of securities at any time. Trades on the 2,500 stocks in its lineup will be executed twice a day, but customers will be able to buy and sell at other times for $14.95. At start-up, the service won't offer exchange-traded funds. Foliofn will keep trading costs down by creating its own market, matching buyers and sellers within its ranks, and eliminating the middleman. The traders will go out into the market when they can't meet buy and sell orders from their own inventory. Foliofn will be a good alternative to mutual funds for investors with substantial funds to play with and a desire for more control over their portfolios than mutual funds offer. Considering that the average domestic equity fund charges 1.44% expense ratio, you'd have to put in close to $20,000 to match the cost effectiveness of a no-load mutual fund, and you wouldn't get the professional money management. Even the Foliofn folks agree that the system wouldn't make sense for customers with only a few thousand dollars who want to trade often.