US dollar coin

How to Invest When You Have a Small Amount of Money


26 August,2013

One of the things I hear a lot is, “But I don’t have enough money to start investing”. Even after the Internet revolution has democratized investing to the point where almost anyone can start investing online, the myth that you need to have a large chunk of capital to start investing persists.

The reality is that you don’t need a lot of money to start investing. You can make a little go further than you ever expected with a little preparation.

Open an Online Brokerage Account

There are a number of online brokerage accounts, like TradeKing, that allow you to get started with no minimum. It’s possible to open an investment account without funding it initially, and you can start investing, in many cases, with as little as $25.

Look for an online broker┬áthat has fairly low fees and other costs, and that won’t require you to invest a lot of money up front. You want to get started as early as you can, so that time is on your side.

Invest in Funds

Rather than trying to pick stocks, invest in funds. Index funds are a good place to start investing. With an index fund, you get a degree of diversity, and if a few stocks on the index head down, it’s possible that the rest of the investments on the index will make up for it. You limit your risk while diversifying your portfolio.

You don’t even have to be able to buy a whole share to start investing in index funds. Many funds will let you invest in partial shares. So, if a fund is trading at $50 a share, but you only have $25 to invest, you can still buy half a share.

It’s even easier to use ETFs. ETFs trade like stocks on the exchanges, so you don’t have to worry about the sometimes-complex rules that governing mutual fund trading when you use a more traditional index fund. ETFs come in index versions, so you can get many of the benefits of indexing in the form of an easy-to-trade ETF.

Use Dollar Cost Averaging

You don’t need a large chunk of capital to be an effective investor. You can do well for yourself over time if you make use of a strategy called dollar cost averaging. Since you can invest in partial shares, dollar cost averaging helps you take advantage of the ability to build up your portfolio over time.

Dollar cost averaging is the way that many small, regular investments add up over a period of decades. With dollar cost averaging, you choose an amount that you can afford to invest each month, and choose a fund to invest it in. If you can invest $50 a month, you set up an automatic plan to do so. Each month, that $50 will buy as many shares of the designated investment as possible. On months when the price is lower, your automatic investment buys more shares. On other months, when the price is higher, your investment buys fewer shares. Over time, many analysts believe that it evens out.

Bottom Line

The important thing is to start investing as soon as possible. Even if you don’t have a lot of money, you can open a brokerage account and get started. Invest consistently over time, and when you have the ability, step up your contributions. Over time, it will really add up.