Owning Stocks for Real -Learn to Earn_ A Beginner’s Guide to the Basics of Investing and Business.
You can play stock-market games from morning till night, but there’s no substitute for the thrill of owning real shares. People remember their first shares the way they remember their first kiss. No matter how many dozens of companies you’ll own in the future, you never get over the first.
At this point, if anything is holding you back, it has to be money. Young people have the time to invest, but they don’t always have the cash. It’s not just any cash that can safely be put into stocks; it’s cash you can afford to live without for many years while it goes forth and multiplies. If you have a part-time job and can afford to invest a portion of your paycheck, so much the better. If not, perhaps you can drop some hints to family members around the holidays.
Here’s where parents, grandparents, aunts, and uncles can play a leading role. The greatest source of investment capital for young people is relatives. When they ask what you want for your birthday, Christmas, Hanukkah, and so forth, tell them you want stocks. Let them know that if it comes down to a choice between owning a new pair of Nikes or owning a share of Nike, which costs about the same amount as the shoes, you’d rather have the share.
This is guaranteed to impress most adults. They’ll be amazed by your foresight and your maturity, and your ratings will soar in the family popularity polls. If they own shares themselves, they can get you started by simply transferring one share, or many shares, over to you. The paperwork is no problem, and they don’t have to pay a fee or a commission to do this. Thousands of young people in each generation are introduced to investing in this fashion, by older people giving them their first stocks. A steady stream of shares trickles down from grandparents to their grandchildren.
Many grandparents have gotten into the habit of giving savings bonds instead of stocks. If you have grandparents of this type, it’s in your best interest to show them the chart on page 110, so they realize how much better off you’d be if they dispensed with the savings bonds and sent you shares of good companies at every opportunity.
While small numbers of shares are routinely handed down from parents or grandparents, it’s been difficult for young people to buy small numbers of shares on their own. Until recently, in fact, young investors have been discouraged from buying the one share or few shares that would get them started investing. Two barriers stand in the way: First, most stock transactions are handled by brokers, and you can’t open your own brokerage account until you’re twenty-one years old, and second, most brokers charge minimum commissions, which range from $25 to $40. If you’re buying one share of Pepsi for $47 and you have to pay the broker a $40 fee, the commission is almost as expensive as the share. No successful investor can afford to pay $87 for a $47 stock.
This sad state of affairs is changing, as companies have begun to sell small quantities of their own shares directly to the public, bypassing the brokers. After all, if McDonald’s can sell you a hamburger, why shouldn’t it be allowed to sell you its stock?
Already eighty companies have adopted a so-called direct investment program in which individuals can purchase a few shares and pay significantly lower commissions than the deepest discount broker, and in some cases, pay nothing at all. It’s the best thing Wall Street has done for young people since the New York Stock Exchange invited the Beatles onto the floor in the 1960s. According to Jim Volpe, a vice-president at the First Chicago Trust Company and a spearhead of the direct investment campaign, at least 850 more companies have said they would be delighted to join the eighty that already are selling the shares directly to the public and the list is growing. (To obtain a copy of this list, call 1-900-225-8585.) The legal wrinkles are being ironed out.
You probably won’t be able to buy just one share via direct investment, because most companies are requiring a minimum purchase of $250 to $1,000. Depending on which company you want to own, you’ll have to save up your money until you’ve got the $250 or whatever it takes, but that’s a minor drawback compared to the benefit of paying a significantly lower commission.
The best part is, once you’ve made your initial purchase, you can continue to buy shares directly from the company, whenever you want, and without paying a penny in commissions. And whenever the company pays a dividend, yours is automatically converted into more shares through the dividend reinvestment plan. In most cases, you’re dealing directly with the company’s transfer agent, without having to get involved with a stockbroker.
Keep an eye out for the news of this exciting new program, which will help put stocks into the hands of millions of investors who’ve been shut out of the market.
If you’re still attached to the idea of buying one share at a time, there’s a program that allows you to do it. But first your family has to join the National Association of Investors Corporation (NAIC). The NAIC is the support group for hundreds of investment clubs around the country. The address is 711 West Thirteen Mile Road, Madison Heights, MI, 48071, and the phone number is 1- 810-583-6242.
As of January 1996, a membership costs thirty-five dollars a year. Individual club members or households pay fourteen dollars a year, which gives them an automatic subscription to a monthly magazine called Better Investing with all kinds of useful information that will help you become a better stockpicker. Most of this material is geared to experienced investors, but some of it is for beginners, and you can learn a lot from it. Aside from the magazine, you get the chance to buy one to ten shares in any one of 151 different companies, and you only have to pay a seven-dollar setup fee per transaction.
The buy-a-share program is designed for kids, although once again, you’ll run into the “age of majority” problem. Depending on the laws in the state where you live, you have to be eighteen or twenty-one to make the purchase on your own. Otherwise, a parent or guardian can act on your behalf—you’re going to need one or the other to sign up for the club membership, anyway.
The program works as follows. The NAIC provides you with the names of all 151 companies in which you can buy stock. You figure out which ones you want to purchase, and you look up the price per share of each. Then you send your buy list to the NAIC, along with a check for the current price of each stock you’re buying, plus the seven-dollar fee per company, plus an extra $10 “fluctuation.” For instance, if the current price of McDonald’s is $40, you send $57.
Why the extra $10? If the stock price goes up between the day you send in your letter and the day your order is processed, the reserve will be used to cover the difference. In any event, the $10 won’t be wasted. Whatever is left of it after you buy your first share will be used to buy a fraction of another share. So, you’ll end up with a share and a sixteenth, or a share and an eighth, or a share and a quarter.
At this point, the NAIC drops out of the relationship, and you deal directly with a representative (the transfer agent) of Wendy’s, or McDonald’s, or whatever company you just bought a share in. Since all the companies on the NAIC list have dividend reinvestment programs, you’ll get additional fractions of shares whenever the company pays a dividend. You can also buy more shares whenever you want, paying a nominal fee, if any.
If you decide to sell your shares, you can either take them to a stockbroker (again, the high commissions might cause you to reject this option) or notify the company’s agent (or agents) in writing. They will dispose of the shares on the next date they’ve scheduled for buying and selling, at whatever the price happens to be at that time. You won’t know exactly what price you’ll get until after the shares are sold.
As long as you’ve gone to the trouble of joining the NAIC, there’s nothing to stop you from joining one of its investment clubs. There are NAIC-member clubs in cities, towns, villages, and schools across the country. Even some prisons have them.
Being in an investment club is like being on a team in the Stock Market Game. The difference is, if you’re in a club, you’re investing real money. Most clubs meet once a month in a member’s house—where the group hashes out the latest stockpicking ideas. Stocks are bought and sold on majority vote.
Each member agrees to invest a fixed amount every month. It could be fifty dollars, or one hundred dollars—whatever the majority decides. As it turns out, most people do better investing in a club than they do on their own. That’s because the club gives them built-in discipline. They can’t sell stocks in a panic, because cooler heads in the group will vote them down. They can’t buy stocks without convincing the group that the stocks are worth buying. This forces them to do their homework. If somebody says, “I’m recommending Disney because I heard a hot tip in the cafeteria line,” he’ll be laughed out of the room.
To become a voting member of an investment club, you have to be at least eighteen, as we’ve already mentioned. But even if you’re not eighteen, you can take part in meetings, recommend stocks, and add your opinion to every discussion. If a club member who’s past the legal investing age is willing to act as your custodian, you can invest your own money through a custodial account.