Twenty dollars may not sound like a lot to spend on a stock, but every portfolio has to start somewhere. And with free trading now available from many brokers and fractional shares being offered as an option, it's possible to buy a stock for just a few dollars. But where should you start?
I think building a foundation of solid stocks with growth potential is the right place to start with small investments. And right now Apple (AAPL -0.21%), Coinbase Global (COIN -12.09%), and Spotify (SPOT -2.12%) are three great places to start putting a $20 investment to work.
1. Apple: The mega-cap stock to start with
It may not sound exciting to start investing with a company as big and established as Apple. But the company is a great choice as a foundational piece of any portfolio, and it also happens to be a cash-generating machine. You can see below that free cash flow continues to grow despite the smartphone market maturing, because Apple has added software services and adjacent products to the mix.
There's no reason to think this growth trend will end. The iPhone is now largely seen as a standard tool for businesses and consumers, and new technologies like cryptocurrencies are being built on top of the iPhone, not replacing it. I think in the coming years we will see Apple's products become more important and cash flow will rise as a result, which is why I like the stock long-term.
2. Coinbase Global: The crypto giant
Cryptocurrencies have gotten a lot of attention for their rapid rise in value over the last few years and the potentially disruptive nature of their technology. But at the center of millions of peoples' exposure to cryptocurrency is Coinbase.
The company doesn't really make money on cryptocurrency rising or falling, but rather on the number of transactions taking place on its network. And you can see below that business has been good for the past year.
On the horizon is an NFT marketplace that already has millions of signups from early adopters. I think this could be an incredibly profitable company in the cryptocurrency space, and that's just one of its values for investors.
Don't forget that Coinbase is also one of the biggest venture capital investors in the crypto industry. It has a position in over 200 cryptocurrency companies. If the crypto tide keeps rising, this could be one of the biggest companies in the world in time.
3. Spotify: Own the ear
Spotify's business began with music, but today it's much more than that. The company has spent hundreds of millions of dollars to build out a large podcast network that includes subscription, exclusive, and ad-supported podcasts. While a handful of music labels are still in control of the music industry, Spotify is building a powerful position in podcasts.
It's Spotify's ad network that differentiates it in podcasts and other audio formats like audiobooks. As Spotify builds a network of creators (podcasts and audiobooks) and a network of advertisers, its job is to connect the two and take a cut of the revenue. This is similar to how Alphabet's Google connects users and advertisers.
In the third quarter, the advertising business was just $323 million, but that was up 75% from a year ago, and gross margin was 10.5%, up from 1.6% a year ago. If Spotify's strategy is successful, we should see revenue continue to grow rapidly and margins expand. And once the flywheel gets started the business should attract more content creators, who will have an incentive to stay with a network that provides high-value advertising they would have a hard time building themselves.
Spotify's business isn't profitable yet, but I think it could be relatively soon as advertising revenue grows and margins expand. And if the company can continue to build out its suite of content, this will be a great stock to own long-term.
Whether you're investing $20 or $20,000, the important thing is to get started investing. I think Apple, Coinbase, and Spotify are great places to start building a portfolio, with leading positions in their industries and improving financials.