When doing what I like to call “entry level” stock investing, it’s as important to bide your time as it is to know when to jump. By entry level, I mean when you want to do it, but only have a few dollars that you can spare towards it. Why is this? Commissions. Trading fees. I use ShareBuilder, which doesn’t cost anything to have an account, and only costs a low fee when I trade. It’s also run by Capital One, which I’ve had business with in the past and trust.
The thing is, with such a low ability to invest, if I traded whenever I had the money to buy a share, I’d drown under the comission fees. ShareBuilder’s trading accounts are FDIC insured for the cash balances. Meaning the money that’s just sitting there, waiting to be traded. Those balances also earn interest, just like a normal savings account. That said, what I tend to suggest is taking your time, transferring over what you can afford, and setting up their Auto Investment system to auto-invest once your account has reached a good threshold.
Now, this threshold will be different for everyone. I tend to figure in the potential dividend payouts with mine, and shoot for a 3 months-to-profit range.
What does that mean?
Well, it means this:
Say the shares cost me $36.83 each, and the auto investment system costs a $4 flat rate per trade. Now, if I wanted to limit my risk based solely on the desire to get that flat fee down to $0.01 per share, for the trade, I’d need to invest in 400 shares, which would cost $14,732, plus the $4 trading fee. That’s not exactly a small amount of money. But, it would mean if the market sneezed and the price of my stock went up 2 cents, I’d be profitable.
But, I’m looking at 3 months to profit. I’m also looking at dividend payouts.
Now, let’s say this same stock pays out a dividend monthly. Now let’s also assume that dividend is $0.18 per share. Just for the sake of the math we’ll assume that for every share that I own, I’m guaranteed that the price of the stock won’t fluctuate, and that I will always receive that dividend. Obviously this is not true for normal stock purchases, but that’s the risk we take. Like I said, I aim for 3 months to profit, but when the stock starts to decline, sometimes it can’t be avoided.
The first thing I need to do at this point is figure out exactly how many shares I need to purchase so that in 3 months I will be seeing a profit. And by profit here, I literally mean $0.01 or more. The first thing I need to do is figure out how I’ll go about breaking down the commission. Well, that $4 can now be divided by 3, because it’s going to be spread out over 3 months. That drops it to 133 shares. But this still has it at $0.01 per share, and it’s still a relatively high number. Due to the dividend payout of $0.18/share, I could actually drop the number of shares I need to purchase, by allowing the commission to stay higher. So I’ll make the commission break down to the same fee as the dividend, $0.18.
That allows for 22.22 shares, we’ll round up to 23. That’s a total cost of $847.09, which isn’t anywhere near the $14,000 range. But, we’re still looking for 3 months to profit, not 1 month. So, we’ll take the 23 and divide it by 3. That brings us to 7.6, which we’ll round to 8. 8 shares, at $36.83 per share, a total cost of $294.64, with a payout of $0.18/month.
To figure out if this will be our 3 month to profit mark, we can do a little more math. Each share pays out $0.18 each month, so a single month will bring in $1.44 in dividends. After 3 months, that is a total of $4.32 in dividend payouts. As you can see, that is a $0.32 profit.
Now obviously the market won’t stay the same for you like that. This isn’t about “profit” in the classic sense, so much as limiting the risk and damage of the trading fees. Dividend paying stocks are powerful tools that any investor should be using. Including them in your portfolio, especially strong monthly dividend payers, will allow you to trade more carefully, while at the same time reaping the benefits.
If you have any suggestions or other methods for limiting the trading fees, leave them in the comments!