Despite what you may think, you don't need a lot of money to start investing. Even with an amount as small as $100, there are smart investments you can make that could multiply your money many times over the long run.
The problems with buying stocks with $100
While I'm generally in favor of investing in high-quality individual stocks, there are a couple of reasons why it's impractical to do so with a relatively small amount of money.
The first problem is commissions. If your broker charges a $9.99 commission per trade, your $100 investment will only buy $90 worth of stock, meaning that you're effectively starting out 10% in the red. And, unless your chosen stock's price happens to be evenly divisible into $90 ($45, $15, etc.), you won't be able to put the full amount of money to work.
For example, say you decided to invest in Wells Fargo, which is trading for about $47.50 as I write this. After deducting the commission, your $100 could only buy a single share, for which you would effectively be paying well above market value.
The other problem is diversification. Even if you are fine with paying the commission on just a couple of shares, there is no way to start a properly diversified stock portfolio for $100. If the one stock you buy has a terrible quarterly report, for instance, you could see a big chunk of your investment's value disappear.
A solution: automatic investments can be the best way to start
Fortunately, there is a way around this problem, and it's actually the way I got started investing when I was waiting tables in college and could only invest a little at a time.
The solution is to choose a high-quality mutual fund that allows you to invest a little at a time. Many mutual fund companies will not allow this, and the standard minimum investment for a mutual fund is typically at least $1,000. However, there are exceptions, especially if you commit to future investments as well.
For example, Charles Schwab generally requires $1,000 to open an account, but will waive this requirement if you set up an automatic monthly transfer, which can be as low as $100. While there are plenty of funds to choose from, a good option if you're just getting started is the Schwab S&P 500 Index Fund (NASDAQMUTFUND:SWPPX), which simply tracks the performance of the S&P 500 by investing in all of the companies in the index. The fund has a rock-bottom expense ratio of 0.09%, well below the industry average, and is highly rated by Morningstar.
There is no commission whatsoever to invest in this fund, or many other Schwab choices, so your entire $100 is immediately put to work for you. And, you'll effectively own a portfolio of 500 stocks, which takes care of the diversification problem.
If you eventually want to diversify even further, there are international index funds, as well as actively managed stock funds to choose from. A few other mutual fund companies offer similar option, such as Ariel Investments, which offers an automatic investment program with a $50 minimum monthly commitment and six mutual funds to choose from. The point is that there are plenty of options available, even if you don't have much money to start with.
It doesn't take much
The takeaway is that even if you don't have much to invest, you can still get started today and have a meaningful impact on your financial future.
As a final thought, consider that the stock market has historically produced total returns averaging around 9.5% per year over long periods of time. To put the power of this kind of performance into perspective, consider that if you're 30 years old, $100 invested in a fund that simply matches the market's performance could be worth nearly $2,400 by the time you're 65. If you're 25, that $100 could grow to $3,750 by that time. Now imagine if you invested $100 every month, or even every week.
The point is that given enough time, investments like the ones I discussed here can turn a little into a lot, and without much homework. So, take the excuse of "I don't have enough money to get started," and throw it out the window.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.