So, you have some money to put to work in the market. Where do you start?
The first thing to do is make sure you're not investing any money in stocks that you might need in five years. While history has proven that stocks are incredible wealth-building tools, anything can happen in the short term.
Now, let's look at some investment options for where you can invest $500.
Keep a long-term perspective
We'll get to individual stock ideas in the next section, but first, a word about index fund investing.
Investing in a low-cost index fund like the Vanguard S&P 500 ETF (NYSEMKT:VOO) is a good option if you don't care about going for big returns. It gives you instant diversification across household-name companies, and while you won't strike it rich in the next 10 years, it will multiply your initial investment over a lifetime. Even Warren Buffett's Berkshire Hathaway invested in a few index funds recently.
If you maintain a minimum holding period of 10 years, you have a high chance of seeing a return on your investment. Recent market history serves as a good example.
The chart shows the return of the S&P 500 index from Dec. 31, 2007, through today. If you had decided to start investing at the end of 2007, you would have seen the value of your investment fall roughly 50% over the next year as the 2008 financial crisis reared its ugly head. But if you hung in there, your investment would currently be up about 130% excluding dividends. You would have even more money if you had taken advantage of the lower prices and added more shares at the bottom.
Invest in what you know
I personally like to stick with individual stocks, because it's more fun and offers greater rewards. The right growth stocks can trounce the returns of an index fund -- which has returned an annualized return of about 10% over decades. And the good news is that you don't have to be the next Warren Buffett to be successful.
Peter Lynch generated phenomenal returns over a 13-year stint managing Fidelity Magellan in the 1980s, and he always advocated buying shares of companies that you are familiar with. His mantra was "invest in what you know."
There's a lot of wisdom behind this advice, because by investing in brands that you're familiar with, you probably already have intuitive insights about what makes the business tick that a number-cruncher on Wall Street hasn't figured out.
Do you exercise a lot or notice more people wearing sneakers? If so, then you might want to buy shares of lululemon athletica (NASDAQ:LULU) or Nike (NYSE:NKE). These stocks have been great performers for investors. The athletic apparel industry is expected to continue growing over the long term, and the great thing about Lululemon and Nike is that these businesses are innovating and delivering the e-commerce shopping experience that so many consumers are demanding these days.
Many people head to the salt mines every morning needing a fancy coffee from Starbucks (NASDAQ:SBUX). The popular coffee chain has had its ups and downs, but it continues to look like a solid investment. Starbucks has a great opportunity to expand in China and still sees opportunity for expansion at home domestically.
Do you binge-watch TV shows? Then adding shares of Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) is a no-brainer. Netflix has 167 million subscribers but is still adding new ones at a rapid clip. Disney+ just launched last fall but already has 28.6 million subscribers. Plus, with Disney, you get a piece of Disney World and ESPN, where theme parks and media networks bring in about $50 billion in revenue every year for the House of Mouse.
How to proceed
You can put $500 in one stock or several stocks with fractional shares. Several brokers are introducing the ability to buy fractional shares right now, including the Robinhood app and Square's Cash app, but traditional brokers like Charles Schwab are expected to launch fractional trading soon.
Consider investing in the stocks mentioned above, and then next month try to add more money to your brokerage account and keep buying stocks. The key to successful investing is to ignore the short-term noise, consistently buy promising growth stocks, and let time do its thing.