It's a common investing myth that to succeed in the stock market, you need to pump a lot of money into it. Recently, I helped a friend open a brokerage account and start investing with less than $500 because that's all he could afford to part with.
Of course, the more money you put into the stock market, the more opportunity you have to grow wealth -- there's no arguing with that. Investing $500 over 30 years at an average annual 7% return (which is a bit below the stock market's average) will leave you with $3,800 after three decades. Investing $5,000 under those same circumstances will leave you with $38,000.
But if you're low on cash to invest right now, the most important thing you can do is get started. Here are two solid starter options.
1. Index funds
If you're low on cash, you may be inclined to go out and find cheap stocks to buy. But if you're limited to a specific price point, you could wind up with stocks you don't really want. A better bet? Look at buying index funds.
Index funds are appealing because they effectively let you snap up a bucket of stocks with a single investment. Index funds charge relatively low fees, but allow you to build a diverse portfolio in an instant. These funds only aim to match the performance of the indexes they're tied to, not beat them. But they have strong histories of outperforming actively managed mutual funds, which charge much higher fees and often come with minimum investment requirements that may, at present, be out of your reach.
2. Fractional shares
Right now, Amazon (AMZN -3.50%) is trading at $3,342.88 a share. If you only have a few hundred dollars to invest, that's not going to work for you.
Or maybe it could.
While you may not be able to swing a full share of Amazon, you could still invest in the online giant by purchasing fractional shares. With fractional shares, you buy a portion of a share of stock rather than an entire share. As Amazon shares gain value, you benefit proportionately. Like index funds, fractional shares make it easy to diversify if you're low on cash. A growing number of brokerage accounts are offering fractional investing as an option these days.
Scrounge up some cash and dive in
While wealthy people may be more likely to invest in stocks, they shouldn't be the only ones to benefit from them. Contrary to what you may have been led to believe, you don't need piles of cash to get started investing. When I first started buying stocks, I had a few thousand dollars to spare -- that was it. Over time, I've pumped more and more money into my brokerage account to build up a nice portfolio, but it certainly didn't happen overnight.
Be patient like I was, but also push yourself to get started immediately. The longer you delay, the more returns you lose out on.