While it is generally easier to invest when you have a larger account balance, there are ways to start a portfolio for $1,000 or less. Although your options may be limited at the beginning, it is important that you start investing as soon as possible to take advantage of compounding returns. Let's take a look at a few ways that you can start investing even if you don't have a lot of money.
Buy Fractions of a Share
Most brokers allow you to buy fractions of shares of stock if you don't have enough money to purchase full shares. That means that you can still invest in Google even though one share is roughly $825.
If a company offers a dividend, you will receive payment equal to the number of full and fractional shares that you own. Therefore, it you owned half a share of stock, you would get half a dividend.
Look for Brokers That Allow Monthly Contributions or Have Low Minimums
Brokers such as Charles Schwab require a minimum balance of $1,000 for most investment accounts. However, they do allow individuals to start by contributing $100 as long as they agree to make $100 contributions until their account hits the minimum required balance. Moreover, there are brokers that allow investing with as little as $500.
This is ideal for those who don't have a lot of money to invest because it allows them to get started while also forcing them to get into the habit of saving on a long-term basis.
Put Money Into a DRIP
Investing in a dividend reinvestment program (DRiP) allows individuals to buy shares of stock directly from a company. Typically, you have to buy them through a broker or receive them directly as part of an employee benefit plan. These are beneficial to new investors because you can contribute as little as $20 to $50 depending on the terms of the plan that you sign up for.
Each time that a dividend is awarded, the money is reinvested in the form of additional shares. Those shares are then eligible for a dividend, which means that you receive more money that is used to buy even more shares. Regardless of your account balance, this can be an effective way to increase the return of your investment over time.
Invest in Index Funds or ETFs
One problem that you may have as an investor with a smaller balance is a lack of diversification. In most cases, those with small balances may only own shares of stock in one or two different companies. Buying an index fund or ETF allows you to buy exposure to multiple sectors with one purchase.
Index funds are generally regarded as the best way for any passive investor to earn the largest possible returns no matter how experienced they are or how much money that they have. In addition to diversification, these funds offer low management fees, and they may also be more efficient from a tax standpoint.
Buying an ETF may be advantageous because it offers diversification as well as liquidity since they are bought and sold just like shares of any other stock. Unlike index funds that track the entire Dow 30 or S$P 500, ETFs can be tailored to include only dividend stocks or to otherwise meet your investment goals and objectives.
Contribute to Your 401k
If your employer offers a 401k, you should contribute to it every pay period. Most plans offer target date funds that include a variety of both stocks and bonds. Younger employees are typically enrolled in funds that invest 60-80 percent of their money into stocks from various sectors. You may also get exposure to both domestic and international markets.
It may be possible to ask your employer to automatically deduct money from each paycheck to put into your retirement account. In some cases, your employer may match the contribution, which equals a guaranteed 100 percent return on your investment. You may also qualify for a tax break depending on whether you have a traditional or Roth 401k.
No matter how much money you have, there are ways to contribute to an investment portfolio. Even if you only have $20 a week to invest, the goal is to get yourself in the habit of making contributions on a regular basis. If you need help deciding where to put your money, it may be a good idea to talk with a financial adviser.