Tuesday, January 5, 2010

Never Buy less than $500 of Stock at a time.

A while back I opened a Roth Ira Account, as should any financially responsible 29 year old. My contributions are automatically deducted from each paycheck, and deposited into my Tradeking account. I like Tradeking because they only charge $4.99 per trade, and make trading easy for a novice like me. I plan to max out my Roth IRA contributions once I get out of credit card debt, but for now I contribute $200.00 a month.

Since I am fairly new to investing, I would just invest the money as soon as it cleared the bank. I thought that the sooner it was invested the faster it would make money. The problem is that I would pay $4.99 each time I bought more stock. This greatly affected my earnings for each small purchase, especially since I'm paid bi-weekly. Here's why:

Scenario 1.)
A modest $100 is deposited into my Tradeking account bi-weekly. I use to invest it as soon as it cleared. After doing this for six months, I was paying $59.40 in commission fees for a mere $1200.00 invested. Those commission fees eat up 4.95% of earnings.

Scenario 2.)
Now the same $100 is deposited into my Tradeking account bi-weekly, but instead I wait to six months to invest. After six months I make a single trade. For that one trade I only pay $4.95 in commission. I still have $1200.00 invested, but the commission only consumes 0.4125% of my total investment. That is only a fraction of a percent and almost unnoticeable.

Buying less than $500.00 of stock it isn't worth the commission to me. Below is my breakdown:

I believe spending 1% to invest $500 is an acceptable cost, but ideally you want to save up as much as possible and buy in bulk. How do you regularly invest your Roth IRA contributions?

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