February 13, 2017

How to Invest in Stocks with Little Money

Read more about Investing

You can invest with as little as $5. Even small investments can make an impact. Here are the top ways to invest with little money.

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Start Investing, Even With Little Money

It's easy to talk yourself out of investing if you barely have any money to put up. But the few dollars you have available can go far - if you get started. We show you how.

Do you put off investing because you think you don't have enough money? You may not realize that options exist for investing with less than $100. You could even use spare change to build up to an investment.

If you've been sticking to savings accounts until now, you're not doing yourself any favors. These accounts offer next to nothing in interest, making them nothing more than a place to park your money.

Because every penny counts, investing in stocks helps you save for the future. It may take a long time to see a serious return on your investment, but it is worth it.

The Myths About Investing

There are many myths surrounding investing. Honestly, people just don't understand it. They think only the rich have enough money to invest in companies and see a return on their investment. These myths could hold you back from saving for your future. Here we debunk the most common investment myths.

  • Myth: You have to be rich to use a brokerage account.

    Fact: This is the most common myth. People assume because they don't have thousands of dollars, they cannot invest. Today there are many online brokerage firms allowing investments lower than $1,000.

    In fact, some brokerage firms waive their minimum investment requirement in exchange for regular monthly deposits. In order to waive the minimum, you sign a contract agreeing to a specific monthly deposit. The amount varies by brokerage firm. Several firms offer minimum deposit requirements of $100 per month with low initial investments.

    If you could invest $100 in a diversified fund, wouldn't you rather take the chance? Consider the return you receive on your savings account. Even "high paying" savings accounts only provide a few cents worth of interest. A diversified fund generally provides a higher payout, especially if you are in it for the long run.

  • Myth: You have to have enough money to buy a diversified portfolio.

    Fact: A diversified portfolio is the best way to lower your overall risk. However, it is not only for the wealthy. Many firms offer ETFs (Exchange Traded Funds). These funds make it possible to invest in a variety of investments with little money. ETFs work alongside an index, such as the S&P 500. Purchasing ETF shares gives you a portion of the portfolio of the entire index. Some stocks in the index may do well and others may do poorly. They balance each other out, though. This diversifies your risk.

    ETFs provide new investors with the diversification necessary to avoid large losses. They do not require individually purchased stocks, bonds, or mutual funds. You could purchase one or several ETFs the same way you would purchase stock shares.

  • Myth: You are restricted to penny stocks unless you have a lot of money.

    Fact: As a new investor, you don't want to invest in highly volatile penny stocks. By definition, penny stocks are stocks trading for less than $5. But they come with high risk (they're priced low for a reason after all - the companies behind them may not last for much longer or they're just starting out). You are free to purchase any type of stock or other investment with the money you have. Investors with little money tend to do better with blue-chip companies with a long history. The highs and lows are usually less volatile than what you'd experience with penny stocks.

  • Myth: You need a lot of money to buy stocks.

    Fact: Dividend Reinvestment Plans (DRIPs) make it possible to inexpensively invest in a company. You can bypass the need for a broker and only need to purchase one share. The idea behind this program is to continually purchase more stock in the same company. You can do so in several ways.

    • Reinvesting the dividends: As the name suggests, the dividends the company pays you are directly reinvested. Basically, you purchase more shares with the profits you make from the stock.
    • Regular investments: You can set up regular contributions of small amounts of money each month. This enables you to continually purchase more shares.

    Tip: Many DRIPs do not have any commissions, but don't assume. Check with the company to determine the cost, especially if you plan to regularly reinvest in the stocks.

  • Myth: Mutual funds are only available for those who have thousands of dollars lying around.

    Fact: Mutual funds are an affordable way to diversify your portfolio with little money. Yes, there are funds out there requiring very large investments. There are also just as many funds with very low minimum investment requirements, if any. Mutual funds are a great long-term investment with a wide range of diversification.

Steps to Take Before Investing

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  • Before you start investing, you need to get a financial checkup. Are you in over your head in debt? Do you have an emergency fund? You can still have debt and be a smart investor - but you need to be on solid ground before investing any money.

  • Pay off credit card debt. If you're not able to pay off your credit cards every month, the interest you're accruing could negate any returns you'll get on your investments. You're better off using any extra funds you have toward your credit card debt than trying the investing route.

  • Setting up an emergency fund before you start investing. How much you set aside is up to you. At a minimum, you should have $1,000 for minor emergencies. Eventually, you should work up to saving 3 to 6 months' worth of income, though. This protects you against the unexpected.

It might seem like you will never be able to invest if you have credit card debt or don't have a large savings account. However, you can save $1,000 in one year with less than $100 per month. Every extra dollar you pay towards your credit card debt helps to lower the interest you pay. As long as you stay consistent, you can be ready to invest sooner rather than later.

How Much Money Do You Need to Start Investing?

The million-dollar question is how much money do you need to start investing? There is no magic answer to this question. You could start with just $5 with many trading apps. Now, that $5 will not get you much, but it is a start. Trading apps allowing investments as low as $5 have a listing of funds available for little money. Unlike investing directly in stocks, you own a part of the stock with other investors. You do get diversification with these funds, so the risk level is lower.

You can also start investing with more money, say $100 or $500. In the investing world, these are not large amounts of money, but they do get you an investment. You can choose from ETFs or DRIPs. You can also invest directly in stocks if you have your heart set on a particular company. ETFs and DRIPs offer a lower risk level, as they provide the diversification you desire. Investing directly in a specific company puts all of your eggs in one basket, which is not an ideal situation if that company gets in financial trouble.

How to Start Investing

So, you can start with as little as $5. How do you start? You don't want to pay a large commission or brokerage fees, so there is not a lot of advice coming your way. The key is in research. The more informed you are, the better investment choices you'll make.

If you shop around for big-ticket items, you already know what to do. You have to shop around. Technology has brought forth many discount brokerage firms. Which one is right for you is up to your personal preference. If you can handle the decisions on your own, you have more choices for little to no cost.

Read brokerage reviews and see what other investors have to say. Just because there is a brand-new brokerage app available doesn't mean it is the best one. Take your time and figure out where your money will do the best. There is no way to predict how investments will fare, but doing your own research will help.

Options for Investing for Beginners with Little Money

We understand the overwhelming choices you have at your disposal, even without a broker. Here we break down some simple options you have for investing with little money.

  • Employer IRA:
    Never give away free money! That is exactly what an Employer-Sponsored IRA provides you. If your employer provides matching contributions, this investment is a must. Even if you only invest a small percentage of each paycheck into your IRA, it builds up over time. Generally, you should maximize your contributions to take advantage of your employer's matching contributions. If you cannot afford the maximum contribution right away, try to work up to that point.

    Contributing to an employer-sponsored IRA can be a no-brainer when you set up automatic withdrawals. You never see the funds because they are automatically deposited in your IRA account. After the first few times, you will not even miss the money. It takes the chance of backing out of the investment out of the equation.

  • Find Automatic Investments:
    Today "robo advisors" handle automatic investments. You can find many of these advisors online or in your phone's app store. These online advisors handle your portfolio for you. The only responsibility on your shoulders is the need to fund the account. Typically, you sign an agreement regarding the amount you will deposit each month. Many firms do charge a small management fee. Make sure to read the fine print before signing up with the firm.

    There are literally hundreds of robo advisors available today. Popular ones include:

    • Betterment
    • Wealthfront
    • WiseBanyan
    • Hedgeable

Investing in Stocks

Many discount brokerage firms make it easy to purchase individual stocks. The fees these firms charge is minimal, and it gives you a chance to own a portion of a company. If you have your heart set on a specific company, this could be an affordable way to achieve your dream.

If you want to own a portion of a stock because you have little to invest, consider DRIPs. The Dividend Reinvestment Plan allows you to start with a minimal investment and work your way up. Your reinvested dividends or contributions build up your ownership of the company's stock.

Treasury Securities

If you want an investment with the lowest possible risk, treasury securities are a good bet. These securities do not change with the market - they are predictable. They are the United States Treasury Department's debt to the security holders. Each security has its own maturity date. They range from 30 days to 30 years. Make sure you only invest money you can part with until the maturity date. If you cash the bill in earlier, you risk losing a portion of the principal.

Benefits of Investing with Little Money

Investing with little money might seem like more of a hassle than it's worth. How much can you make on a $5 investment, after all? Honestly, there are benefits of investing as little as $5, including:

  • You get in the habit of investing. Sometimes getting started is the hardest part. You think you cannot part with even $1 each week or month. This type of thinking is what prevents people from investing. If you start with just $5 or $10 and contribute regularly, you get into the habit of investing regularly. Down the road, you will likely find yourself wanting to invest more.

  • You broaden your horizons. There is much more to invest in than stocks alone. If you are not a risk taker, there are many options available. If you only have a small amount of money available to invest, it forces you to think outside the box. Investing in DRIPs or ETFs are great examples of profitable investments for little initial deposits.

  • You diversify your risk. The less money you have to invest, the less likely it is you will directly purchase stocks. Instead, you will likely stick to the index funds or Dividend Reinvestment Plans. Both options offer diversification and the chance to build your investment over time.

Downsides of Investing with Little Money

We always want to show you both sides of the equation. As you probably guessed, there are downsides to investing with little money:

  • It takes a long time to see a return on your investment. If you are not patient, it is easy to want to rip your money out of the investment. You need to plan for the long term. Don't invest money you may need in the next few months or year. Instead, invest money you won't miss in order to let it do its job and grow.

  • Purchasing individual stocks from large companies is nearly impossible. You have to stick with DRIPs or ETFs to invest in a particular company.

  • You may have monthly deposit requirements in exchange for waived brokerage fees or minimum deposit requirements.

  • Your available advice is usually quite limited unless you have a large amount of money to invest.

The Bottom Line

Everyone should invest at some point. It does not have to be the moment you become an adult or even the moment you have a child. You know when the time is right for you. Make sure the pieces of your puzzle are all in order first. Don't invest if you have a large amount of credit card debt or don't have the start of an emergency fund going.

If you have these things taken care of, though, and waste money on daily coffee or fast food, go ahead and take the plunge. The sooner you start investing - even a few dollars - the quicker you can grow your retirement funds.

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