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How Do I Start an Investing Account for My College Graduate?

Question: I am interested in starting an investment account for my recent college graduate. My plan is to make an initial stock/bond investment to get him started. My questions are: What/who is the best online investment firm to use if we are starting out small and want to pay as little as possible in fees? When I make the initial investment does he have to contribute to the same fund every month (i.e. purchase more of the same) or can he wait and invest at a later date? When he does invest more money is it advisable to invest in other funds? Is it worth his while to purchase individual stocks in companies he supports (i.e. Starbucks, etc.)?

–Vicky Stewart Smithtown, N.Y.

Answer: First off, kudos for thinking long term. Young investors have plenty of years ahead of them, which means their investments can ride out periods of market losses. To get started, consider a discount brokerage firm, which will charge less in fees. SmartMoney’s 2011 broker survey found that accounts at Scottrade and ShareBuilder are among the most affordable. Investment management company Vanguard also came out up top.

Once the account is set up in his name, you’ll fund the account – that is, transfer cash from a bank account to the brokerage. Only once there’s money in the account can you (or your son) choose an investment to buy. And he doesn’t have to make regular contributions, but experts recommend it: Setting up an automatic transfer will get him in the habit of investing regularly, he will get the benefit of what’s called dollar cost averaging, and some mutual funds will waive fees or minimums for people who invest regularly.

And yes, it can be worthwhile to purchase individual stocks of companies he supports, though the benefits may be more psychological than financial, says P.J. Gardner, founding partner at AGW Capital, an investment consulting firm. He’ll be more interested in tracking the stock’s performance if it’s a company he cares about, and that may keep him engaged in investing going forward, he says. On the other hand, individual stocks can manifest big swings – one share of Starbucks, for example, has traded as low as $22.69 and as high as $41.11 in the last 52 weeks. A low-cost, broadly diversified mutual fund would be less volatile than a single stock, but your son might also find it less interesting.

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