Thursday, March 7, 2024

How To Start Investing With a Small Amount of Money

Investing can be a daunting subject – especially trying to figure out where, how, what, how much to start with. It seems like many guides and lists floating around start with the assumption that the investor has a few thousand dollars. It’s simply unrealistic. Fortunately, with the advancement of financial products (like low cost, index ETFs) and financial institutions’ ability to process trades, there are now feasible ways to get started for just a few bucks.

The hardest part is starting, but luckily, that's pretty easy! Here are the steps to take to get started.

  1. Open an Account
    • If you’re 18 or older, you can open an individual brokerage account anywhere. I have experience using platforms like Fidelity, Schwab, Merrill, and Robinhood. Though my favorite is Fidelity.
  2. Link a bank account to more easily transfer cash in
    • Creating a connection between a check or savings account will make any future transfers in or out quicker and easier. Any extra cash saved up? Send it over. Something came up and you need to withdraw some of the funds? A few clicks (and potentially a few days) later and it’s there. Plus, you even set up a recurring deposit as a way to force yourself to save/invest some extra dollars.
  3. Invest the Cash
    • For people without knowledge of investing, I understand this can be the main barrier to entry. There are so many people saying so many different things it can be hard to sift through the noise and know what’s right for you. I’ve been investing for 11 years now and prefer to use low-cost index ETFs (more later). I have only used Schwab and Fidelity platforms recently, but I am certain that Fidelity allows investors to purchase fractional shares of ETFs. That means if you only have $20 to invest or $100 to invest, you aren’t limited by what you can invest in. The S&P 500 is what is widely referred to as ‘the stock market’, and one of the most popular ETFs to purchase to invest in the index tracking the 500 largest US companies is IVV. The iShares S&P 500 Index. One share is worth just over $500 which means for investors at Schwab, you’d need at least that much to just get started. Fidelity is great in allowing fraction purchases and removing that price floor. Any amount will get you in.
As someone who does has been doing this almost every day for the last decade, I’m confident the start up and time commitment is much less daunting than many believe. To get started does take the course of a few days or a week, but the time you need to actually dedicate to the process is short. The hardest part is just getting started.

Quick explanation on investments referring to point 3. When investing with a long-term mindset and plan (which I recommend if able), choosing to put the dollars in the stock market has historically generated the highest return. Picking the right investment can be overwhelming unless you narrow your focus to ETFs and mutual funds. These are similar investment products in that they are a basket of individual companies packaged into one ticker symbol. Instead of buying 1 company stock, you can add diversification to the mix and buy a fund containing hundreds or thousands of stocks. For beginners and those that want to manage investments hands-off, choosing a low-cost index fund can be a good idea. An index like the S&P 500, or the Nasdaq, or the Russell 1000 are popular choices.

How ETFs and mutual funds differ is how they are traded. Mutual funds are bought and sold direct from the fund company. If you want to sell all or a part of your holding in ticker ABCDX (mutual fund tickers are 5 letters, always ending in X), you redeem your shares with the fund company. They are then responsible for having cash on hand within the fund to meet the redemption requests. This can create very inefficient tax situations and they are generally not recommended to hold in a taxable account (like an individual brokerage account). ETFs are traded just like stocks – throughout the day and between investors. If I want to sell and you want to buy, we can do that by placing orders at our respective broker (like Fidelity, Schwab etc.). The fund company then doesn’t need to worry about generating cash from the funds holdings and can largely avoid the tax-inefficiencies that plague mutual funds. 

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