When you're first thinking about investing, one of the hardest things is figuring out where you'll find the money to start. For a lot of us, coming up with just a couple of hundred bucks can require a lot of diligence and cost-cutting. You might feel as though you'll never be able to save enough to make your first stock or mutual fund purchase.
Yet you don't need a big bankroll to start investing. A wide range of options are available for investors of modest means, so that you can take what you've already saved and get started.
Mutual funds for mini-investors
Irrespective of how small your investment is, you can set up a diversified portfolio with hundreds of individual holdings within each mutual fund you purchase. That makes mutual funds a perfect tool for the small investor. You also can't beat the cost. Since mutual funds charge expenses based on a percentage of the assets you have invested in the fund, small shareholders pay incredibly low fees. For a $100 investment in an index fund, for example, you might pay as little as 10 cents per year. That's a bargain.
Of course, mutual fund companies could never make money if they didn't collect enough in fees to cover the cost of a single mailing to their shareholders. As a result, you'll often find that funds require investors to make a minimum initial purchase, ranging from $1,000 to $10,000 or more. But don't get discouraged. As Shannon Zimmerman, the Fool's mutual fund expert, has pointed out on numerous occasions, many mutual fund companies, such as T. Rowe Price (Nasdaq: TROW), allow investors who are willing to make automatic monthly or quarterly transfers from their bank account to open positions with as little as $50.
Stocks for small investors
Even though mutual funds can provide a good foundation for your new portfolio, some beginning investors are eager to buy shares of individual companies, too, so as to improve their potential for bigger returns. Psychologically, it's easier to deal with the prospect of losing a few hundred dollars on a bad stock pick than losing your entire savings after you've spent years accumulating it.
Investors who wanted to buy individual stocks once faced lots of barriers. Brokerage commissions were extremely high, and most brokers didn't like dealing with investors who couldn't buy at least 100 shares of stock in a single transaction. With shares of many companies, including brokerage firm Goldman Sachs (NYSE: GS), exchange CBOT Holdings (NYSE: BOT), and financial-services conglomerate Fairfax Financial (NYSE: FFH), costing more than $100 per share, these rules made it hard for anyone without five-digit savings to buy stock at all.
Now, however, greater availability of financial services has made it easier for small investors to make stock purchases. Discount brokerage firms often offer stock trades with commissions for less than $10. And so-called odd-lot purchases of less than 100 shares are no longer a problem for most brokerage firms. The brokerage firm Sharebuilder lets you set up automatic investments in a wide range of individual stocks for just $4 per trade, with further discounts if you subscribe to a pricing plan that gives you multiple trades per month. Whether you want to take advantage of exchange-traded funds or make an investment in your favorite company, these programs can make it possible for you to buy stock without paying big commissions.
In addition, some companies offer stock directly to interested investors. These plans can also offer additional features, such as the ability to reinvest dividends to buy additional fractional shares of stock. Check with a company's investor-relations department to find out whether it offers such a program.
Too many people let their small savings amounts keep them from starting to invest. With all of the options available to small investors, however, there's no reason to put off investing any longer.
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Starting an investment program is just one component of a successful financial plan. For more useful tips about every aspect of financial planning, try out Motley Fool Green Light. A free 30-day trial will show you everything that the newsletter service has to offer, from commentary to advice.
Fool contributor Dan Caplinger started investing 20 years ago, with two mutual fund purchases totaling $350. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy helps investors big and small.
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