So, you’ve heard all the advice about how you should be investing, and you can’t wait to get going. You are considering your first investments and there’s only one problem – you don’t have much money.
You’re not alone in this regard. Every investor would like to have tens of thousands to start, but many begin investing with much less. The truth is that it’s not about saving up a huge amount of money to invest, it’s about taking that first step and investing what you can. That’s how you make investing a habit, and once you do that, you’ll find yourself saving more and contributing it to your investment account.
If you put off investing because you feel like you don’t have enough money, you’ll likely keep putting it off. By understanding some key concepts, you can start investing with a few hundred dollars or less.
Your First Goal Is Risk Management
You can lose your money any time you invest it, but the level of risk involved varies significantly depending on the investments you choose. The best investors manage their risk no matter how much money they have, but this becomes even more important when you don’t have much money to lose.
Now, low-risk investments aren’t as exciting as high-risk investments. You aren’t going to make huge money quickly, and instead, you’ll be earning a steady return on your money. What you need to realize is that if you’re making high-risk investments in hopes of a big win, that’s not investing, it’s gambling. You may get lucky, but you could also get lucky at the casino.
What are low-risk investment opportunities that don’t require much money upfront? There are several great options.
An index fund is one of the best investment options for the beginning investor. This is a portfolio of many different stocks and bonds, and the benefit is that it allows you to hold a diverse portfolio without committing a large amount of money.
By holding so many different stocks and bonds, your money isn’t at the mercy of a single company’s performance. Let’s say that you get an index fund with stocks on the S&P 500 Index. The S&P 500 Index is 500 of the leading stocks in the United States. Some of these stocks will go up while others will go down.
But when you look at the performance of the stock market over a period of decades, you can see a clear trend – it goes up consistently, so you can expect your index fund to increase in value over the years. You could easily earn 8 to 10 percent every year, which will add up as your money compounds.
You can invest in an index fund for just $250, although your options will be limited. If you have $500, there will be more index funds available. You can always invest more money later as you save more.
Dividend Reinvestment Plans
With a dividend reinvestment plan (DRIP), you’re purchasing a small amount of a stock from a company directly. Since you’re not going through a broker like you would with other stock purchases, you won’t pay any broker fees.
As you earn dividends on your investment, you can then reinvest those dividends, hence the name of the plan. There are many large companies that offer DRIPs, such as Coca-Cola and Home Depot. While you won’t have a diverse portfolio to start, this option is available for a very small amount of money, as some DRIPs allow you to start investing with just $20.
Loans are an Option
With peer-to-peer (P2P) lending, you can invest in another person’s loan. This is a relatively new type of lending that came out in the United States in 2006. The borrower applies through a P2P lending site, such as Peerform, Lending Club or LendingTree. The site runs that borrower’s credit score and other financial information to assign him a risk score. Then, the loan request is put on the marketplace, along with information about him, including that risk score. Investors can choose loans on the marketplace that they want to fund.
The interest on the loan is the return you receive on your investment. Since groups of investors fund the loans, you don’t need to commit a large amount of money to any one loan. You could get started with $50 or less. The important thing is to check the borrower’s risk score, as you don’t want to fund a loan for a borrower who will end up defaulting.
Choosing Stocks with Little Money
One thing that doesn’t get brought up much for investors without much money is choosing individual stocks. When you’re starting out, it’s smarter to go with an index fund to minimize your risk.
Can you start investing with individual stocks? Yes, but you’ll need to spend more time finding the right ones.
The best options are companies with a long track record of success and continued growth. These are less likely to tank, although that can still happen. Many once-successful companies end up closing – just look at a chain like Blockbuster. That’s the risk you take with this approach.
If you’re very interested in learning about investing, then picking your own stocks is the best way to learn. But for most investors, keeping it simple is the superior approach. Researching companies to try and predict which ones will do well in the future is a time-consuming process.
You can go as deep into the investing world as you’d like. If you want to make it a serious hobby or even a full-time job, you can do that given enough time and hard work.
In the early stages, especially when you’re investing with limited funds, don’t let your ambition convince you to take unnecessary risks. Start small and focus on earning a consistent return. When you have more money saved, then consider using a small amount for higher-risk ventures.
Editor’s note: Andrew Altman is the editor-in-chief of SlickBucks.com which is a website dedicated to growing your wealth through investing your hard-earned cash cleverly. For that, Andrew publishes reviews, informative articles and guides that help you achieve your financial goals.