Conventional wisdom since I've been investing has been that ordinary investors should put their money into mutual funds and buy the market rather than purchasing individual stocks. That advice is based on three factors:
- Many small investors lack the time, desire and/or know-how to adequately investigate the value of a company and therefore could purchase shares at the wrong price point or hold them when they should sell;
- Investments should be diversified, and small investors are unable to invest in enough different stocks to be diversified and
- The sales commissions charged by traditional brokers took far too large a piece of a small investor's investment.
A new website, Loyal 3, seeks to address the last two items. Loyal 3 sells stock in 64 different companies to individual investors You can purchase fractional share and therefore can invest as little as $10 in each company. More importantly, Loyal 3 does not charge to buy or sell stocks. If you want to invest $100 in Coca-Cola, you can do that, and you will pay no sales commission.
Is there a catch?
Yes, sort of. Loyal 3 does what they call "batch trading". If you call your full-service broker and tell him to sell your stock in xyz, he'll do so almost immediately. If you tell him to buy PDQ, it is yours. Loyal 3 waits, and places one order per day for the stock. If you are trying to market time, Loyal 3 is not for you. Also, they only offer 64 stocks, so if you want something else, you have to go elsewhere.
Have I tried it?
Unlike most of the other products on which I have reported, I have not tried Loyal 3. I am planning to open accounts for my kids and my nephew and to give them stock for Christmas next year. I'll pick something like Disney or McDonald's and couple the gift of stock with some merchandise. The low initial investment ($10) and lack of sales commissions make that possible.
Conclusion:
I think conventional wisdom is probably right to discourage ordinary investors from putting too much money into individual stocks. However, I find individual stocks far more interesting than mutual funds. While I would stick with mutual funds for the majority of my investing, I think Loyal3 offers small investors the chance to invest a little fun money with companies they find interesting.
*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and Shoeaholic No More*
Sounds a bit like mortgage bundling---made lots of money for the bundlers ;) Where is the company making money? Think about setting them up with an E Trade account and let them pick a stock. A little less "gambling".
ReplyDeleteI enjoy the market, but it is work. Buy what you know, sell half when you double, only ten stocks at a time.
They generate fees from the companies whose stocks they sell; they aren't real clear about how they do that. They also generate fees for IPOs. The problem with an Etrade account is that they charge $9.95 per trade, so if you want to buy $100 worth of stock, that's steep. If you want a stock that is listed with Loyal 3, the only reason I can think of to use another broker is if you want to use stop-loss or limit orders. If you are buying and holding, particularly if you want to invest small amounts at one time, this seems like the way to go.
ReplyDeleteHow are the capital gains (and Losses) kept? We haven't "played" outside of our IRAs in a long time. I remember that piece being a nightmare come tax time. Do short sales work the same way (under a year in a stock?)
ReplyDeleteI don't know about Loyal3, though I assume they issue tax forms like everyone else. We have mutual funds outside our IRAs and when we sold them to move to another fund, we got a tax form that I was able to plug into our return.
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