How to Invest $20, $100, and $1,000 (and More)
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This article was updated on Dec. 30, 2015.
Got only $20 to put away right now?
It may not sound like much, but you can use it to buy shares in Ford Motor. Or Bank of America. Or Hertz. And those are just a few of the thousands of options available for cash-strapped investors. What if you can spare $100 -- or $1,000? Your options are even broader.
We're not here to tell you where to invest your money. We won't lay out a handful of stocks on a "buy" list. But what we can tell you is how you can invest your money -- the mechanics of investing small, large, and medium amounts of cash. We can even help you choose a broker.
How to invest $20
Let's start with $20. We'll assume that you've already paid off any high-interest debt and that you have some money stashed in a safe place (like a savings or money market account) that you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough, and you want to begin investing for your future.
Is it even worth it to invest such a pittance?
Heck yeah it is! One of the best ways to invest small amounts of money cheaply is through Dividend Reinvestment Plans, commonly known as DRIPs. With a DRIP, any cash dividends you receive from a company are automatically reinvested in more of that company's stock. This means you're steadily building your position in that company, so your capital gains will increase exponentially over time.
On top of that, DRIPs -- along with their cousins, Direct Stock Purchase Plans (DSPP) -- allow you to bypass brokers (and their commissions) by purchasing stock directly from the companies or their agents.
Thousands of major corporations offer these types of stock plans -- many of them free, or with fees low enough to make it worthwhile to invest as little as $20 or $30 at a time. DRIPs are ideal for those who are starting out with small amounts and want to make frequent purchases (a powerful investing tactic known as dollar-cost averaging). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.
DRIPs may be one of the surest, steadiest ways to build wealth over your lifetime (just make sure you keep good records for tax purposes). For more details on Drips, see "What if I can only invest small amounts of money every month?"
How to invest a couple of hundred bucks
So you've weeded out all the nickels from your spare-change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund. An index fund that tracks the S&P 500 index, for example, will match your returns to those of an investment that has historically returned about 10% per year.
Some index funds require an initial investment as low as $250. This low minimum is usually restricted to individual retirement accounts (IRAs). After your initial investment, you can add as much money as you like, as frequently as you like, with no additional costs or commissions. You can purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman.
If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, broadly diversified (500 companies!) stock portfolio.
How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and now you'll have your pick of fund companies that require higher initial investments. This freedom will enable you to shop around for a fund with the lowest expense ratio.
You should also seriously consider opening a discount brokerage account. You'll want to focus on the account option that best serves your needs; some accounts require a minimum initial deposit, and some don't. That means you can open up an account with whatever investing money you have available and start researching, and perhaps purchasing, individual companies. (Or, if you're enamored of index investing, you can easily invest in the SPDR S&P 500 ETF (NYSEMKT: SPY ) , a stock-like investment that mimics the performance of the S&P 500.)
The key here is to keep your costs of investing (including brokerage fees) to less than 2% of the transaction value. So if you're planning to add to your position in stocks a few times a month, then a DRIP or an index fund may still be the way to go.
How to invest $1,000-plus
What can you do with a grand? Obviously, with $1,000 you can open up a discount brokerage account, but consider the rewards if you can scrape up an additional $1,000 a year to add to your original investment.
Say you have 30 years until retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then in 30 years you'll have about $200,000. Keep at it for another 10 years, and your money will more than double to $532,000. That seems worth it to us. And if you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on your savings when you withdraw them in retirement.
Again, even at this level, the key is to keep fees from eating up your earnings. So make sure the costs of investing (including brokerage commissions, stamps to mail in checks, and books that help you learn to invest) are less than 2% of your account's overall worth. With small accounts, that can be a challenge, but with such low commissions being offered by discount brokers, it's definitely doable.
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