What is a cover letter?
A cover letter is simply a short business-like letter that you include with your picture and resume when you're sending them out to an agent.
What should be included in a cover letter?
Start off by introducing yourself and mentioning something that will make you stand out - saying something like "I really want to act" is pointless, considering if you didn't want to, you wouldn't be writing the letter, but telling them that you're currently taking classes with a certain teacher and are looking for representation so you can put your skills to use could catch their attention.
After that, briefly tell them how you heard of them and maybe mention a positive comment that someone made about them. Tell them why you think they should represent you - make sure to emphasize your good points.
Make sure your letter is eye catching, short and to the point. Keep it no longer than about half a typed page and avoid being negative, silly, or braggadocios. Also make sure to carefully proofread it - there's no bigger turn-off than a cover letter containing spelling and grammar mistakes. And don't rely on spellcheck to catch your mistakes - get someone who is strong in written English and have them look it over.
What should it look like?
Cover letters should look professional - meaning they should be typed and properly arranged on the page. Use a clear, easy-to-read font on white paper, although you can get creative with it - perhaps make a neat letterhead or add stickers, if that's your style. Just don't go overboard.
When do you use a cover letter?
Cover letters are pretty much only used when you're looking for an agent. However, if you are sending out a package to a casting director, it's a good idea to include a letter with it that mentions why you're sending the picture (ie. a specific role, new pictures, updating resume etc.), and perhaps mentions what project you're currently working on.
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