How cash-strapped investors can break into the stock market

There are cost-effective options for investment-minded people who don't have much money socked away.

If you're looking to make a small initial investment in a mutual fund, Wall Street won't come flocking to your door. What about Vanguard, a favorite of investors looking to save on fees? With the exception of one of its more than 80 funds, consumers need at least $3,000 for a single lump-sum investment. Fidelity? The minimum starting investment for most IRA accounts is $2,500. T. Rowe Price? The lowest first-time investment in a taxable account is $2,500.

America's major mutual fund companies, it seems, simply aren't very interested in very small investors, making it hard for them to make investment proceeds off the dollars they do have available.

"It reminds me of when I was 16 and looking for jobs, and all the places I applied to said 'prior experience necessary.' But how do you get it if it's never available in the first place?" asks Jeff Seely, chairman and CEO of ShareBuilder Corp., which targets small investors with low-cost stock purchases.

But there are options for investment-minded people who don't have much money socked away. If they make the right choices, cash-strapped investors can find ways to get into stocks, bonds, and, yes, mutual funds.

The easiest and cheapest approach may be to simply open an interest-bearing savings account or buy a treasury bond. These investments may be just the ticket for someone with only a few hundred dollars to invest - a young worker without a workplace 401(k) account, for instance.

"There are lots of high-yield savings accounts," says Robert Brokamp, editor of Motley Fool's "Rule Your Retirement" newsletter, who recommends one offered by Internet bank ING Direct that's paying almost 4 percent. "You can put in a small amount for free with no account minimum. Once that builds up, you can invest in stocks."

Stocks come with their own hassles: fees. The expenses that come with buying shares through a broker can erase any near-term gains, and account-maintenance costs can eat into profits, too. It's possible to buy stock cheaply, however.

Scottrade allows online stock purchases for $7, while charges $11.95 to $14.95 for stock purchases and allows automatic monthly or weekly investments for $4 each - without any maintenance fees.

"Our whole strategy and mission for the last six or seven years has been to find an affordable and easy way for the early-stage investor to start [investing] and keep at it," says Mr. Seely, whose company now has about 1 million clients.

Investors can bypass large fees by buying stocks directly from the companies themselves. Home Depot, for one, offers its stock directly to consumers with a minimum purchase of $500, plus a first-time service fee of $5.

"Investing in an individual company has more risks, but if you choose a large-cap blue chip company, hopefully over the long term you'll still do pretty well," Mr. Brokamp says.

Mutual funds, which reduce volatility by tracking a number of stocks at once, are another alternative - but only if you can find one that will work with you.

While she doesn't have statistics about changes in the minimum amounts required to invest in mutual funds, Christine Benz, director of Morningstar's fund analysis, says the minimums have clearly been going up, especially over the past five years.

Indeed, last November, Vanguard boosted the minimum required to open an IRA mutual fund account from $1,000 to $3,000. (Some other brokers continue to allow smaller fund investment minimums if clients put money in IRAs.)

Critics say Wall Street has abandoned the small investor.

"The message is that 'You're just not worth our time.' No question about it," says Brokamp, the newsletter editor.

He remembers when mutual funds allowed people to create accounts with as little as $10.

But Vanguard spokesman Michael Smith points out that it's not cheap for fund companies to offer small accounts.

Vanguard charges $3.60 in annual fees to a person who invests the minimum of $1,000 in the STAR fund, the company's only fund that allows initial lump-sum investments of less than $3,000.

But Mr. Smith says Vanguard actually spends more than 10 times as much for that level of investment to manage the fund and provide client services.

There's another hitch for mutual fund companies that deal with small investors: Funds that accept low initial investments tend to remain small themselves, says Morningstar's Ms. Benz.

People who put in, say, $250 to start aren't likely to add much more, she says. "What fund companies found is that a lot of these accounts just kind of languished."

What to do? Benz recommends mutual funds offered by the respected Oakmark Funds, which allow investors to get in with as little as $1,000. But she cautions that small investors need to beware of funds that accept small investments but charge clients large fees.

Another option: Invest in a fund that allows small investors to bypass investment minimums if they agree to automatic investments from their paycheck or bank account each month.

T. Rowe Price, for one, allows clients to open accounts with $50 monthly automatic investments, giving investors the opportunity to get in the game with as little as $600 a year.

Finally, you can avoid mutual fund companies altogether by buying an exchange-traded fund. Some ETFs are designed to be the equivalent of mutual funds, but they are traded as if they were stocks.

The usual caveat applies: Shop around and make sure fees don't zap your investment.

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