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3 Cheap Investments That Are Better Than Penny Stocks

By Katie Brockman - Jan 31, 2021 at 1:52PM

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Penny stocks could wreck your investments. Here's where to invest instead.

Investing in the stock market is a great way to generate wealth, but it can be expensive. Individual stocks can cost hundreds or even thousands of dollars per share, and not everyone can afford to invest that much money.

Penny stocks have gained popularity as a way to invest inexpensively. These stocks trade for less than $5 per share, making them an attractive option for investors on a budget.

However, penny stocks can be incredibly risky. Generally, the companies that offer penny stocks are smaller businesses, which tend to be more volatile than larger corporations. It can be difficult to determine whether these companies are solid investments when they don't have long track records, and penny stocks often experience extreme price swings.

For these reasons, it's best to avoid penny stocks. However, there are a few other cheap investments that are just as rewarding, yet carry much less risk.

Hand stacking piles of coins

Image source: Getty Images.

1. Fractional shares

Like penny stocks, fractional shares are some of the most affordable investments out there. They allow you to invest in individual stocks for as little as $1. The difference between penny stocks and fractional shares, however, is that instead of investing in small companies, you can invest in big-name stocks like Amazon (AMZN 3.66%), Tesla (TSLA 7.33%), or Apple (AAPL 4.08%).

With fractional shares, you invest in a small portion of a single share of a stock. If you want to invest in Amazon, for example, but you don't have $3,000 to buy a full share, you can buy a fractional share for however much you can afford -- whether it's $500, $50, or even just $5.

Besides affordability, the other advantage of fractional shares is that it's easier to build a diversified portfolio. When you're investing in individual stocks, it's wise to invest in at least 10 to 15 different stocks across various industries to limit your risk. Buying 10 to 15 full shares of stock could easily cost thousands of dollars. But with fractional shares, it's much more affordable.

2. Index funds

An index fund is a group of stocks or bonds that's designed to track a particular stock market index. Broad market index funds track major stock market indexes like the S&P 500, the Dow Jones Industrial Average, and the Nasdaq. Other index funds track niche sectors of the market if you're interested in investing in a particular industry.

Index funds are generally low-cost because they're not actively managed. They mirror the indexes they follow, so they don't require a portfolio manager to decide which stocks to include in the fund.

This type of investment is perfect for someone who wants to take a low-risk, hands-off investing approach. Each index fund can contain dozens or hundreds of stocks (or more), so your portfolio is instantly diversified. You also won't need to choose individual stocks or decide whether to buy or sell investments. All you need to do is invest in your index fund, and let it take care of the rest for you.

3. ETFs

ETFs, or exchange-traded funds, are very similar to index funds. They're collections of stocks grouped together into a single investment. 

The biggest difference between index funds and ETFs is how they're sold. Index funds can only be bought or sold at the end of the trading day, while ETFs can be traded throughout the day like stocks. This difference mainly affects people who trade regularly, however, not long-term investors.

In some cases, ETFs can be cheaper than index funds. Although index funds are low-cost, they still have some administrative and operating expenses. ETFs charge fees as well, but they are sometimes lower than what you'd pay with an index fund. Some brokerages also offer lower minimum investment requirements with ETFs than with index funds, making it cheaper to get started.

Investing doesn't have to be expensive, and there are ways to limit your risk while keeping your wallet happy. By avoiding penny stocks and investing somewhere safer, you can maximize your rewards without breaking the bank.

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