Invest in Stocks with Little Money

How to Invest in Stocks With Little Money: The Ultimate Guide

Do you want to invest in stocks but think you don’t have enough money? The good news is that It is possible to make investments even with the little that you have. There is a general misconception that you can only make such investments when you have thousands of dollars. Nothing could be further from the truth. With the many investment options around, you can even start as low as $50!

If you don’t save up enough money for the future, you are bound to end up in a catastrophe. A day will come when you will no longer have the strength to work and social security, assuming it will survive in the many years to come, will not be enough to sustain you. You should start investing the little that you have now. If you have no money to spare, perhaps the following ideas might help.

My advice is straightforward: There are some things in your life you will have to part with. And I’m not talking about life changing decisions here. It could be something as simple as skipping your regular morning coffee at Starbucks or failing to hit the bar regularly after work as usual to save some cash.

Let’s assume that you cut those expenses by half, and you manage to save up at least $50 every month. When one year ends, you would have saved $600. The $600 could even translate to over $22,000 in just over 20 years. Many would be quick to dismiss $600. You may not see it as much, but I will be showing you the different ways you can invest the amount to get significant returns.

Penny stocks or blue chips?

Are you expected to only invest in penny stocks because you have little money? No. There is no restriction as to the type of stock you can buy depending on the amount of money you have. If you make a $500 investment, the value will not change because of the number of shares you buy or the price you buy them.

For instance, if you chose to buy $0.10 worth of penny stocks trading over-the-counter, you can get 5,000 shares. The same amount may only get you five blue chip stock shares trading on the New York Stock Exchange at $100. Although the latter gets you fewer shares, the value of the investment is the same in both cases.

Penny stocks can be attractive. A small increase in the price of the stock represents a substantial percentage rise. On the other hand, they pose the highest risk for an investor in the market. So no matter the amount of money you may have for investment, remember that penny stocks have the highest chance of making massive losses.

Blue chip stocks tend to have more credibility as the SEC carefully monitors their exchanges. They are not as risky as penny stocks that trade over the counter. However, keep in mind that any investment in the stock market has some degree or risk whether penny stock or blue chip.

Types of investments

Brokerage account

A brokerage account is an agreement between you and a licensed brokerage firm that enables you to create an account with the brokerage, deposit funds, place investment orders and earn income from the capital gains arising thereof. The company will, in turn, take a certain percent of your earnings as a commission for their services.

There are various types of brokerage firms and brokerage accounts. You should pick those that can address your financial requirements. Some full-service brokers will give you extensive advice as an investor but charge you very high fees in return.

Majority of the brokers, however, will only give you a secure platform through which you can place orders. They charge lower fees for the service compared to their counterparts. The brokerage accounts may also be different when it comes to the scope of tradable assets, the speed of executing orders and tools used.

Full-Service Brokerage Accounts

If you don’t have knowledge on how to invest, you should seek help from financial advisers by working with a full-service brokerage firm. Such companies include Morgan Stanley, UBS, Merrill Lynch and Well Fargo Advisors. You will pay them to assist you in formulating development plans and in executing the transactions. They can either work on a non-discretionary basis, where they will need your approval before any transaction or in a discretionary manner, where they don’t need your consent.

A full-service brokerage account can have either of these two fee structures: Commission or advisory fee. In a commission-based account, the brokerage firm will earn a certain percentage any time you buy or sell a stock is whether you or the advisor recommended it. In an advisory fee account, the firm will deduct a flat fee of 0.5% to 1.5% on your total balance. You will not be charged any commission when a stock is bought or sold in this case. Make sure to go for the most efficient option after consulting your financial adviser.

Discount Brokerage Account

Ally Invest Logo

If you don’t need any help making investment decisions or are not able or willing to pay hefty fees, a discount brokerage account will do just fine. Unlike full-service brokerage firms, it is not likely to put a dent in your finances. However, what you pay is what you get; it will be up to you to do all the research and analysis. My favorite brokerage is Ally Invest. They have very low fees, easy-to-learn trading platform and great support.

Direct stock purchase plans

The commissions charged by brokers can be expensive for those who have very little to invest. If only there were a way to bypass the middlemen altogether? Well, thank the high heavens for Direct Stock Purchase Plans. The plans enable you to buy company shares directly from their transfer agent thus saving you a lot of money you could have otherwise paid as commission. There are hundreds of companies lining up to offer you just that.

Dividends Reinvestment Plans

Divide Reinvestments plans are similar to DSPs. They allow you to buy shares directly from the firm. But with DPIPs, the money you receive as dividends is reinvested back into the company’s stock automatically. It means that your shares will continue to increase, and your position in the firm will continue to grow steadily.

If you only have a small amount money to invest and would prefer to make frequent purchases, DRIPs are perfect for you. Once you get into the plan, you can set it up in such a way that your payments are made automatically. One added benefit is that it is not a must you purchase a full share every time you contribute.

Exchange traded funds

Exchange traded funds (ETFs) are products that follow performances of particular sectors in the investment market. You can even purchase a single ETF share through a broker. Some ETFs will track performances of the bond market, the total stock market and much more. Most of them will pay dividends.

Target Date Funds

Just like their name suggests, target date funds will target the date of your retirement. As your retirement date nears, they will vary the percentage of stocks and bonds and ensure the safety of your money. Some of these funds will demand a minimum amount of $1,000, but they could be great if you didn’t want to manage your portfolio. Be careful of the high fees that some of the target date funds charge.

Commissions

As we discussed earlier, investment accounts usually charge commissions whenever you buy or sell stocks. The percentages may vary from one account to another. You should factor in this cost before opening such an account. These transaction fees have the potential to hurt your investment especially if you have limited funds.

Commissions can be very costly if you trade consistently. Any trade that you make will incur a fee. When you buy five different stocks at a go, they are viewed as five different trades, and each one will attract a fee. The least commission you can hope to get is 10%, but it can even go as high as 30%!

Assuming you only had an investment of $1,000 at the time of buying the five trades, the trading costs will add up to $50. The amount is already 5% of your total investment (1,000). If you invest the full amount, your account will read $950 after these deductions. You have already made a loss before earning a single cent!

When you finally decide to sell the five stocks, you will incur the same trading cost–$50. After buying and selling the five stocks, it will have cost you 10% of the initial $1,000 investment, which is $100. In case the stocks fail to earn enough money to cover the loss incurred, you will lose money instead of making a profit at the end of the day.

Mutual Fund Fees

You will incur many different types of fees if you invest in mutual funds, but the most crucial one is the management Expense Ratio (MER). The management team will charge you the MER every year depending on the number of assets you have in the fund. You are also likely to attract some sales charges (loads) as well after buying mutual funds.

Diversification

Diversification is the only safe bet in investing. When you invest in a wide range of assets, you reduce the risk significantly reduced since the performance of one investment is less likely to impact the entire investment. As they say in the financial world, “don’t put all your eggs in one basket.” The only drawback with this type of approach is the problem we just discussed above.

Whenever you invest in many stocks, each one of them will be considered a trade and, therefore, attract a commission. Buying many shares in the name of diversification can be detrimental to your investment especially since you have limited resources. A $1,000 investment might be impossible to diversify. You can try investing in one or two companies for a start.

It is possible to invest in the stock market with a little amount of money. You should never use lack of money as an excuse not to invest. However, it might not be as easy as just picking the right investment. As an investor, you need to be aware of the minimum deposit requirements. You also need to make a comparison of the commissions charged by each broker and pick a favorable deal that will suit your financial needs.

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