10 Ways to Invest Small Amounts of Money
A lot of people think that you need a ton of money and a yacht to start investing… FAKE NEWS!
You can start with as little as $500. The popularity of low commission brokers such as ETrade or Scottrade opened the golden gates of investing to Joe the Plumber and the rest of us. Now Robinhood is getting rid of the gate altogether by offering Zero Commission trading.
Here are 15 ways to invest small amounts of money.
1. Decide if you want to invest long term or short term. This would guide your investment strategy and the companies and types of stocks you choose.
2. Invest in what you are interested in. If you like tech companies, then find a few ones you know and start researching them. How does Facebook actually make money? (side note: If you’re not paying them, you’re probably the product. Stew on that one for a minute…) You’ll be a lot more engaged if you actually care about the company’s product.
3. Do your research! Don’t blindly invest in a company only because you’ve bought their products or someone recommended you buy the stock. Especially don’t buy it just because someone recommended it.
5. Diversify. It’s the whole… don’t put all your eggs in one basket. Don’t invest all of your money in one stock or one industry. This is hard to do with small sums of cash, but not impossible (see #7 below).
6. Know the difference between the stock price and market capitalization. Be careful of comparing companies by their stock price alone. All the stock price tells you is how much one share of the company is worth… but since companies can have different numbers of shares, you have to look at stock price TIMES number of shares to get the true valuation or Market Capitalization (referred to as Market Cap or Cap). Even then, the true value is in the financials and ratios so go back to #3 above!
7. Pick companies with low stock prices ($10 to $50), large Market Caps and high Volume. This relates to #5 above. A low stock price doesn’t mean the stock is cheap, but it does help you not blow all of your money on one stock. Make sure the company is large enough (i.e. high Market Cap) that enough people are buying and selling the stock (i.e. High Volume) so you are not stuck with a stock you can’t sell.
8. Don’t buy penny stocks! Low stock prices don’t guarantee success, especially with penny stocks. These are much more risky than traditional stocks because their value can rise and fall in the blink of an eye. You can lose your shirt in an afternoon if you’re not careful. Also, it is likely that they are not frequently traded so you can be stuck with it for a long time… and then lose your shirt.
9. Don’t invest all of your savings in stocks. Stocks are a great investment vehicle, but they are also just one of many such as ETFs, Bonds, Mutual Funds, etc. Consider your options and keep a rainy day fund.
10. Have fun! I know, what a cop-out. You couldn’t think of a 10th tip so you went all kumbaya on me?! I want my money back!
But seriously. Although I think anyone can learn about investing and should at least learn the basics, not everyone shares my enthusiasm. To be a successful investor, you need to invest time in knowledge first. If you’re not having fun, you won’t be motivated and you’ll end up having to buy a lot of shirts.