There are many ways that you could go about this, but I am going to hone in on one very specific suggestion that basically sticks to what I usually recommend when it comes to building the necessary funds to really have a better shot at getting to where you need to be to dive deeper into stock market investing; That is, if you only have a couple thousand dollars to get started, investing in individual stocks is a bit more risky than investing in a mutual fund, or in an exchange traded fund (ETF). In the short term the objective is to reduce risk, and accumulate money over time, which allows you to build up to enough money to play with.
A mutual fund, or an ETF is one way you can accomplish this, and is my preferred method of generating initial capital to invest. I should note that its also not a bad way to continue to generate income to play with more once you're in.
As I said, I am going to be very specific here, so irrespective of what I am suggesting, it is important that you do your own due diligence before taking it as the gospel and putting it into action. We'll call this my disclaimer for legal purposes: This is not a recommendation nor a solicitation to buy the specific ETF I am about to suggest. You may employ this suggestion using any mutual fund or ETF that you think best fits your investment objectives.
I will also tell you that I am not a licensed broker, nor am I an accredited investor, and I am not a trained or licensed financial advisor. I am just a guy who likes to invest in the markets, and this is simply a suggestion based on my own experience getting in, staying in, and being profitable in the stock market. That said, when it comes to your money, I would rarely take the advice of most of these guys anyway. After all, it is your money, and as such, you are the one taking on all of the risk. When it comes to your money, you should be 100% involved in what it is doing. You should treat your money perhaps as you would treat your own body. If you lose your body, you lose everything, and nobody cares about your body like you do.
Go to CAPITAL ONE 360 and open up a savings account starting with $100. You will be linking this account directly to your checking account, which makes it very easy to work with and move money around. Plus, right now Capitol One 360 does happen to pay one of the better dividends on what is essentially a basic savings account. As of this writing they offer a current APY of 0.75%.
Go to ShareBuilder and open an account there. I suggest initially funding this account with at least $2,010. If you can fund the account with more, go ahead and do it. Why $2,010? I'll get to that in just a minute.
Once you have opened up your Capital One 360 account, and your ShareBuilder account, and have your checking account linked to Capital One 360, link your Capitol One 360 account to your ShareBuilder account. ShareBuilder is owned by Capitol One, and so this is very easy to do. I would also link your checking account to your ShareBuilder account so that you can also easily move money around from ShareBuilder to Capital One 360, or to your checking account, and vice versa. With Step 3 complete, you can now move money very easily to and from savings, to and from checking, and to and from your investment account. Access, to my mind, is peace of mind.
Once you have your ShareBuilder account funded and ready to go, you will want to make your first investment. Login to your account and go to the TRADE tab, and click on TRADE NOW. This will bring you to your order ticket.
The ETF I suggest investing in is the Nuveen S&P 500 Buy-Write Income Fund (BXMX). I happen to like this particular ETF for a couple of reasons. One, it has traded fairly stable over time. Two, it pays a fairly high dividend yield. As of this writing it is currently yielding 9.16%, or 28 cents per share paid on a quarterly basis.
Buy $2,000 worth of BXMX. I highly recommend placing a LIMIT ORDER as opposed to a MARKET ORDER, since a LIMIT ORDER allows you to be in control of the price you pay for the shares.
As of this writing BXMX is trading at $12.18 per share. I would set the limit at the current trading price for the day you are looking to enter the position—this helps to ensure you'll get your order placed sooner rather than later, and you'll still be able to buy the exact number of shares you wish to buy. The trade will cost you $6.99. Thus, the $2,010 gives you some legroom on the trade, and ensures you'll be able to buy as close to $2,000 worth of shares as possible. In this case I would set my limit at $12.18, and set my share purchase at 164 shares. This will actually cost me $2,004.51. With 164 shares at a 9.16% yield, I can expect to receive dividends each quarter of $45.92. Your account will default to reinvest divdends. Do not reset this default. You want to reinvest dividends.
Now onto the process of building up those funds. Each and every month, like clockwork, decide to buy at least 10 more shares of the ETF. If you can buy more, of course go ahead and do this. It will greatly reduce your overall cost basis. Buy the new shares the same way you bought the old shares. If you buy at least 10 shares each month, and allow the dividends to reinvest, your share totals should be increased by around 135 shares a year depending on the price of the shares at the time of reinvestment.
The amount you want to get to in order to have a better shot at investing in the stock market is around $10,000. And by the way, this money that you put into this ETF should be considered money that is officially "off the books." In other words, don't forget about what it is doing—because obviously you want to carefully watch the performance and be able to make any decisions if things go wrong—but rather forget that the money is in your pocket. It's "off the books," "off the grid," "untouchable," whichever word best fits your mindset. This is your seed capital to dive deeper into the markets, eventually be able to add margin to your account, and move up to Tier 1 level options approval, which is where the fun begins.
But that story is for another day. Getting started is what this is all about for now. Build it, and once it's built, then you can worry about having a bit more fun, and making more money as well.
Disclaimer: Jim Bauer currently owns shares in the Nuveen S&P 500 Buy-Write Income Fund (BXMX).
AUTHOR'S NOTE: At the time of the writing of this article BXMX was trading under ticker symbol JSN and was the Nuveen Premium Equity Opportunity Fund. All of the price and yield information was based on JSN facts and figures. However, BXMX still offers a solid yield, and is still as stable as it was when it was JSN.