I often hear people say, "I'll start buying stocks once I save up X amount of money." And that amount usually is in the thousands of dollars. Their idea is you need to invest a pretty big sum in order to win in the stock market. But I've got great news for you: That actually isn't true. You can start investing with any amount of money, from a few dollars to a wad of cash. And if, overall, you make wise choices, you can set yourself off on the path to wealth.
So, if you're new to this, consider how much you can afford to invest after your bills are paid and you've set aside funds for any potential emergencies. Let's imagine that amount is $500 -- not every month, but just as one initial investment. Here's how to get started.
Comfort with risk
First, it's important to consider your relationship with risk. If the idea of a stock dropping in the double digits makes you cringe and you're uncomfortable with volatility, you're better off favoring stocks that won't keep you up at night. By this, I mean companies you can count on for earnings growth over time and companies that aren't overly sensitive to the economy.
Big pharmaceutical players like Johnson & Johnson, selling products people need regardless of the economic environment, are a good example. You also may consider consumer goods companies with solid brand strength, like Procter & Gamble.
If you can handle some risk, you might prefer growth stocks, or those that are increasing earnings at a faster rate than the overall market. Examples are companies like tech stock Nvidia or electric vehicle giant Tesla.
So, if you're a cautious investor, consider favoring the "safer" and steady stocks -- and if you're an aggressive investor, you may want to favor growth.
Next, considering your comfort with risk, define your investment goals. If your top goal is to grow your investment as much as possible during a given time frame, this, too, points to investing in growth stocks. If you're looking for passive income, though, you'll want to take a look at dividend stocks, especially those with a long track record of dividend growth.
Holding on for the long term
And a discussion of investment goals isn't complete without mentioning time frame. You'll get the most out of the investment experience if you hold onto your positions for the long term, so at least five years.
But, as you choose stocks, consider whether you aim to hold on for five or six years -- or whether you want to potentially hang onto that player for a decade or more. This is particularly important if you're investing in the world of biotech because some players are working on exciting treatments today -- but product launches are several years away. That means revenue growth and share performance may take a while to take off too.
Now, let's talk about diversification. You might wonder how to do this with only $500. But you can. That's because you don't have to buy hundreds of shares of a particular company. Instead, you can buy a share or two -- and in some cases, you can buy even less thanks to fractional shares. So, for example, with $500, you can buy a fractional share of Regeneron Pharmaceuticals and full shares of lower-priced stocks. It's important to spread your money across several companies rather than putting all of your eggs in one basket. It offers you more opportunities to win and reduces risk.
Invest in what you understand
Finally, before diving in, be sure to understand the companies/industries you aim to buy. The more you know and understand about a particular stock, the more likely you are to make the right investment decisions -- such as whether to buy, hold, or sell at a particular time.
Considering all of these points, you're ready to invest that $500, and your investment could grow over time if the stocks you've chosen progress. You also may consider reinvesting any dividends paid to you back into that particular stock -- that will help boost the size of your portfolio. And, to keep your portfolio growing, you might set aside a certain amount of cash every month or every few months to invest in the same stocks or new stocks. Even a few dollars could make a difference down the road.