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If you're going to invest in the stock market,
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you're either going to invest in a specific stock like
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Apple or Tesla, or you're going to invest in a
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fund which probably contains many stocks. To buy a specific
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stock, it used to be that you had to buy
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at least one share in that stock. So if Apple
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stock was priced at $150, you needed at least $150.
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These days, some platforms allow you to buy fractional shares,
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so you could buy part of a share for just
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one dollar. I suppose that could be useful for teaching
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you how to buy a share, but its not going to
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teach you much about the emotions of investing. If the
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stock doubles in value,
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you've made an extra dollar, which wouldn't even buy you
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a cup of coffee. If your platform charges you to make stock
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trades,
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you could have spent 5 pound or $5 just to buy $1
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of stock, which doesn't make sense. It's worth emphasising
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here, that in my opinion, investing in individual stocks is
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not a good way to save towards your retirement. Individual
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stocks are far too risky,
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and there's a reasonable chance that you lose money or
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at least don't make very much. So don't think that
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buying a stock has got you started on a path to investing for
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your future, more like it's a bit of fun to
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see if you can pick a stock that does well.
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If you need to scratch that stock-picking itch,
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don't let individual stocks become more than 10% of your
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stock portfolio for your retirement, and that includes stock from
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your employer. The rest of your portfolio should be boringly
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sensible funds, where risk is diversified across many different
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stocks. So how much does it cost to buy these?
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Well,
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it's worth considering both upfront costs and ongoing
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fund management costs. There are two types of stock funds that
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you can buy: mutual funds and exchange traded funds, ETFs.
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The structural differences between them aren't that important,
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but they can have different costs associated with them. Mutual
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funds are like the dinosaurs of the investing world.
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There's nothing wrong with them,
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but I find them a bit annoying. The price of the fund
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changes only once per day,
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so you never know exactly what you're going to pay
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for them. The mutual fund may be actively managed or
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passively managed. An actively managed fund hires some clever people to
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try to pick stocks and try to beat the market.
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Sadly,
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they don't beat the market very often but these clever people
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are expensive so you are going to pay 1 to
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3 percent per year. A passively managed fund is just
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going to track the market index,
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so it's much cheaper, between
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0.05%
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and 0.5%
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per year. Most mutual funds have a minimum investment amount.
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On some UA platforms,
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this is as low as $1 for certain funds. Many
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other banks have a minimum of $100 or $500 and some are
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much higher. If you want to invest in the Vanguard lifestrategy
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mutual fund while living in the Middle East the minimum
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is 75,000 pounds!
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Another problem with mutual funds is that they can have
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initial upfront charges as high as 5% and exit charges
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as well. Some platforms waive these charges,
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but it's always worth checking. There may be an annual platform
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fee for you to hold them also.
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Exchange traded funds, ETFs, are mostly passively
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managed and as their name suggests, you buy them on a
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stock exchange like an individual stock. They're sometimes available in fractions,
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so you could in theory start with $1. ETFs from
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the London Stock Exchange or European stock exchanges however,
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are typically not sold in fractions and their price varies
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from around $5 to $150. There aren't any
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initial fees, platform fees or exit fees for ETFs but you
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will have to pay a trade commission each time you
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buy yourself,
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just like a stock. The size of this commission varies
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hugely across different platforms and it's one of the main
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costs of investing.6462
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