How to Invest 100 Dollars

Six great ways to invest $100 starting today

You have $100 and are looking to put it to work. Here are our six best suggestions for how to do that:

1. Start an emergency fund.
2. Use a micro-investing app or robo-advisor.
3. Invest in a stock index mutual fund or exchange-traded fund (ETF).
4. Buy stocks in fractional shares.
5. Put it in your 401(k).
6. Open an individual retirement account (IRA).

Now, let's take a look at each of these in more detail.

1. Start an emergency fund

You might be thinking, "This isn't an investment." And you're right.

2. Use a robo-advisor

Once you have financial emergencies covered, you're in a much better position to start investing. But what if analyzing stocks and other investments sounds a little too much? In this case, a robo-advisor may be just the ticket.

Robo-advisors ask a few questions about your financial goals and life circumstances, and then develop a customized investing strategy. They'll use basic information, such as age, family size, income, and risk tolerance. Robo-advisors then handle all the details of selecting investments, making purchases and sales, and keeping you informed.

3. Invest in index funds

Stocks are the most powerful wealth-building tool the average person can buy. However, it can be really hard to pick the winners, and individual stocks can be intimidating for newer investors. This is where index funds come in.

When you invest in an index fund, you buy a piece of every company held in that index. In other words, if you invest $100 in the SPDR S&P 500 ETF Trust (NYSEMKT:SPY), you'll own a tiny portion of all 500 companies in the S&P 500 index. Over time, index funds can be excellent wealth-building tools, with minimal effort from you.

4. Use fractional shares to buy stocks

Index funds make stock investing easy, but picking your own stocks can also be a great way to invest. If you have the time and desire to do some basic stock research, it's entirely possible to produce excellent long-term returns. And that's especially true if you already have a solid backbone of index funds.

It's easier than ever to start a stock portfolio with $100 or less. Most brokers nowadays no longer charge commissions, and many major brokerages offer fractional share investing.

So, what exactly is fractional share investing? In short, you tell your broker how many dollars you want to invest in a stock. For example, if you invested $100 in a stock that traded for $500, your brokerage account would show that you owned 0.2 shares of that company.

Looking to invest in index funds? Good news! Most brokers who offer fractional investing for stocks will also let you buy fractional shares of ETFs.

5. Put it in your 401(k)

If you have a 401(k) or other employer-sponsored retirement plan, funding it could be an excellent use of your investment dollars. That's especially true if you haven't maxed out your employer's matching contributions.

There's even more to like about investing in your 401(k): lower taxes. Every dollar you contribute to your 401(k) is considered a pre-tax contribution, meaning you won't pay income tax on that dollar for the year you contributed it to your account. Better yet, your investments will grow tax-free until you start taking distributions in retirement.

Are you self-employed? You can open a solo 401(k). You won't get the free money from an employer, but you can still take advantage of those pre-tax contributions and tax-free growth.

6. Open an IRA

Have an extra $100 you want to invest for retirement above and beyond your company 401(k)? An individual retirement account (IRA) is a great way to go and can turn even small sums of money into a big nest egg over time.

Let's say you stash $100 a month in an IRA for 30 years. Based on the S&P 500's historical performance, the $36,000 you invest would be worth almost $180,000. That's the power of compounding gains over time.

Why an IRA? In a word, taxes. With a traditional IRA, you gain similar benefits as with a 401(k), reducing income taxes by cutting your taxable income each year you contribute while also growing your nest egg tax-free until you start taking distributions in retirement.

A Roth IRA gives you the same tax-free growth as a traditional IRA. But instead of getting to lower your taxable income each year that you make contributions, distributions in retirement are 100% tax-free.

One way not to invest $100

One trap to be aware of is investing in penny stocks. Penny stocks are typically low-priced stocks of smaller or thinly traded companies.

While it may seem logical that tiny companies or stocks trading for just pennies per share (or even less) have the highest return potential, the reality is that the world of penny stocks is full of fraudulent companies and pump-and-dump schemes (think The Wolf of Wall Street). In short, if you're asking how best to invest $100 in penny stocks, the answer is, "Don't."

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