How To Invest $1000 or Less

Many people hear the word “invest” and automatically move their hands over their pockets to make sure their money is still there.  I was one of these people. I was so afraid to lose my money that I never even considered the potential earnings I could gain by investing.

Investing is risky and anybody that tells you otherwise is not telling you the truth.  But you can minimize that risk by knowing how to invest and where to invest.  Picking the right funds or stocks and having a solid asset allocation strategy doesn’t eliminate the risk that you will lose money, but it can minimize it to the point where you can sleep soundly at night.

You definitely take a risk when you invest in anything, but investing in the stock market is one of the best ways to grow your money.  It is also one of the best ways to have your money work for you.

There are others who think you need a lot of money to start investing and I’m here to tell them… no you don’t.

What To Do Before Investing

It should go without saying, but I’ll say it anyways, before you start investing money you should do a few things.

• Pay off your debt – Before you start investing, you should be debt free – at least free of consumer debt; having a mortgage is fine and student loans are debatable.  But it doesn’t make sense to be paying 14% interest on credit card debt because that’s a 14% loss, and don’t nobody want that. (The grammar is okay in this situation).

• Have an emergency fund – The amount you should have in your emergency fund is up to you, but you should have some money stashed away in case of emergencies.

How To Invest $1000 or Less

You can start by opening an online brokerage account.  The difficult part will be picking the right brokerage because they all have different minimum balance requirements.

Vanguard and Fidelity are great brokerage, which I use, but the minimum balance for most of the accounts are $1000 and $2500 respectively.

You can, however, open an account with a discount brokerage such as Scottrade or E-Trade.  These discount brokerage will allow you to open an account with less than $1000.

We have accounts with Vanguard, Fidelity, and Scottrade, and found Scottrade to be the easiest to set up.  With Scottrade we were able to start investing right away, but with Vanguard and Fidelity we had to wait a couple of days until they could verify our bank accounts.

I would recommend that you stick to buying indexed mutual funds and/or indexed ETFs because the fees are a lot lower.  If you decide to purchase individual stocks, be aware that there is a fee involved per trade which can put an initial dent on your investments.

For example, if you only invest $100 and you pay $7 for that purchase, you are down 7% from the get go.  But if you invest $1000 and you pay $7 for the purchase, you’re only down 0.7%, which is a lot easier to recover from.

You can also buy shares or fractional shares directly from the company through a Direct Stock Purchase Plan (DSPP).  There is no minimum balance required when you use a DSPP because you don’t have to open a brokerage account, and the fees to purchase are very minimal, if any.

You don’t call the company directly to purchase shares, instead you deal with a transfer agent the company has contracted to manage the sales of shares.  The two major transfer agents are Computershare and BNY Mellon Shareowner Services, but there are others as well.  You can check out the investors relations section on a company’s website to find out if they offer a DSPP plan and who their transfer agent is.

Another way you can start investing with less than $1000 is by buying fractional shares.  Services like Sharebuilder allow you to open an account with no minimum required.  Once you have your account, you set up an Automatic Investment Plan which allows you to invest in any stock, mutual fund, or ETF on a weekly, bi-weekly, or monthly basis.

You can decide any amount of money you want to spend and Sharebuilder will invest it for you in the stock, mutual fund, or ETF of your choosing.  If the amount you invest is not enough to buy a full share of a particular stock, Sharebuilder allows you to buy a partial share and you can slowly build your shares, hence the name.

Start Investing Now

Investing might sound scary and you might think only rich people can do it, but that’s just not the case.  You should read some books and do some research and you’ll find out how easy it really is.

I prefer and recommend to invest in indexed mutual funds and ETFs because the fees are low and the risk is also lower, but we also have money invested in individual stocks.  Whichever way you choose to go, make sure you plan to be invested for the long term and give your money a better chance of growing.  Remember that you have the force of compound interest at your side but only if you give it time.

[Photo Credit: stockmonkey.com]