Many investors don't think they can start investing with just $100. After all, a single share of Apple (AAPL 1.68%) costs about $130, while one share of Amazon (AMZN 2.47%) costs nearly $3,500.
That was certainly the case when I started investing many years ago, when brokers scoffed at the notion of selling fractional shares and charged commissions of about $10 per trade. But today, most brokerages offer fractional shares and commission-free trades -- which makes it easy to get started with $100.
It might be tempting to take that cash and chase some of Reddit's hottest meme stocks, but here are three better ideas -- and some of these investments could generate much bigger gains than you expect.
Image source: Getty Images.
1. An S&P 500 Index Fund or ETF
An index fund, which passively tracks an index like the S&P 500, is a reliable way for conservative investors to build their wealth. Most index funds require minimum investments of a few thousand dollars, but the Schwab S&P 500 Index Fund (SWPPX +0.23%) lets investors get started with just $1 and charges a low expense ratio of 0.02%.
Investors might also consider buying an S&P 500 ETF (exchange-traded fund) that tracks the market. Unlike index funds, which can only be bought or sold once a day, ETFs actively trade like stocks throughout the day. The Vanguard S&P 500 ETF (VOO 1.38%) is a popular choice, since it charges a lower expense ratio (0.03%) than most other S&P 500 ETFs.
Investors might think this approach generates low returns, but here's how these funds actually fared over the past three years -- assuming you reinvested their dividends to boost their total returns.
Source: YCharts
Past performance never guarantees future gains, but the S&P 500 has generated an average annual return of about 10% since 1926. That easily beats savings accounts, which have an average interest rate of 0.06%, and 12-month CDs, which offer an average interest rate of 0.14%.
2. Blue-chip dividend stocks
Investors who are willing to take a little more risk should buy shares (or fractional shares) of reliable blue-chip dividend stocks.
One solid example is Procter & Gamble (PG 3.15%), the consumer staples giant that sells Tide, Charmin, Pantene, Pampers, Tampax, and other well-known brands. P&G is so good at generating cash that it's raised its dividend annually for 65 straight years.
That streak makes P&G a Dividend King, or a member of the S&P 500 that has raised its dividend annually for more than half a century. It currently pays a forward dividend yield of 2.6%, which is much higher than the 10-Year Treasury's current yield of about 1.5%.
P&G experienced unusually high growth throughout the pandemic as shoppers stocked up on essential products, but analysts still expect its revenue and earnings to rise 6% and 10%, respectively, this year.
P&G still trades at a reasonable 22 times forward earnings -- even after generating a better total return than the S&P 500 over the past three years -- so it's still a great stock to buy and forget.
Source: YCharts
3. Take a chance on growth stocks
Last but not least, investors who aren't afraid to lose most of their investment should consider putting $100 into some promising growth stocks. I'm not telling you to chase Reddit's latest obsession or speculate about upcoming short squeezes -- I'm asking you to research some disruptive companies.
For example, the cybersecurity company CrowdStrike (CRWD +0.61%) dazzled the market for three simple reasons: It provided a cloud-native platform in a market that still mainly used on-site appliances, it was growing at a faster rate than its peers, and its net retention rates -- which measure its year-over-year revenue growth per customer -- consistently remained above 120%.
CrowdStrike's revenue rose 93% in fiscal 2020, grew 82% in fiscal 2021, and is expected to climb another 56% this year. The company also turned profitable (on an adjusted basis) last year, and analysts expect its earnings to grow 44% this year. Here's how the market rewarded CrowdStrike over the past year.
Source: YCharts
But there's the catch: CrowdStrike's stock has been expensive ever since its IPO, and it remains pricey at 345 times forward earnings and 40 times this year's sales. Investors who chase CrowdStrike -- and other similar growth stocks -- should expect a lot of volatility. But over the long term, these growth stocks could generate much bigger gains than the S&P 500 or Dividend Kings like P&G.
The key takeaways
Investors shouldn't underestimate the power of a $100 bill. It's enough to get your feet wet in the stock market, and there are still plenty of choices for investors -- regardless of their appetite for risk.
