From afar the stock market can seem like an intimidating place to invest your money.
For starters, the wild volatility we've witnessed over the past month is certainly enough to keep skeptical and novice investors parked on the sidelines. Furthermore, the sheer dollar amount changing hands on a daily basis is staggering. Data from NasdaqTrader.com shows that $127.4 billion worth of stock changed hands on a single day: Sept. 18, 2015. This dollar value encompassed a little more than 3,000 stocks, close to 11.9 million total trades, and 3.28 billion total shares. For someone who is just starting out, or is working with a relatively small amount of capital, this data can potentially be overwhelming, especially if you're only putting up $1,000, or less, as your initial investment.
However, there is good news. There are ways to take advantage of the compounding growth opportunities the stock market offers with relatively small amounts of money. In reality, just about no amount of money is too small to begin investing (of course, that will depend on whether your broker has a minimum deposit required to open an account) -- but for the sake of argument let's look at how to invest in stocks with only $1,000.
How to invest in stocks with $1,000
Traditional investing typically involves picking out individual stocks and trying to diversify your nest egg across a handful of companies. Everyone's risk factors are going to be a bit different, so a handful of stocksl to perhaps three dozen companies might be considered the norm when it comes to optimal levels of diversification. With $1,000 this isn't really possible, since commission costs to buy a stock would eat you alive (around 1% of your $1,000 per transaction) if you tried to buy shares in more than two or three different companies.
But there are numerous ways around this traditional investing scheme that could still allow you to diversify your portfolio with only $1,000.
Seek out a discount broker
Capital One Investing, formerly known as ShareBuilder, allows investors to purchase stocks of their choosing, and it has no minimum deposit requirement to open an account. What makes Capital One Investing so intriguing is that members can purchase fractional shares of a stock. This is extremely helpful if, say, you wanted to buy shares of Apple, Netflix, and Amazon.com, all of which boast relatively high share prices, and you only have $1,000, or even a few hundred dollars, to work with.
Additionally, having a recurring deposit set up to add money to your account every week, two weeks, month, or quarter gets you in the mind-set of saving and investing regularly for your future.
Lastly, Capital One Investing takes any notion of trying to time the market out of the equation, with its ultra-low commission costs setting your purchase order for Tuesday. It's truly a platform geared for the long-term investor who's starting from the ground up.
Buy an ETF
The question of how to invest in stocks with only $1,000 can also be answered with a broad-market or sector-focused electronic-traded fund, or ETF. Going this route allows an investor to buy a basket of stocks, all housed under the umbrella of a single fund. In doing so, an investor can gain exposure to a specific sector of interest, such as healthcare of semiconductors, or a region of interest, such as Brazil, or take a broad market approach by purchasing an index ETF, such as the SPDR S&P 500 ETF.
The minute downside? ETFs typically have annual management fees, known as expense ratios, which you'll end up paying for. For most ETFs this expense ratio is below 1%, so this shouldn't be too much skin off your back if you're planning to hang onto an ETF over the long term.
Open a DRIP
You could also turn to a dividend reinvestment plan, or DRIP, although you could give up some of your diversification by going this route. A dividend reinvestment plan allows you to purchase shares of stock directly from a company without paying a fee (thus saving you on commission costs). Depending on the company, it may also let you purchase fractional shares, similar to what Capital One Investing will let you do. What makes a DRIP special is that your dividend payments are rolled back into more shares of stocks. As time passes, the number of shares you own will rise, as will the dividend payment you'd be due.
Purchase a low-cost mutual fund
Lastly, investors with only $1,000 (or less) can consider investing in a low-cost mutual fund. The idea is a lot like buying an ETF in that you're seeking instant diversification without having to pay an arm and a leg in commission costs and fees. Low-cost mutual funds will sometimes accept deposits for as little as $50, and their annual expense ratios can be pretty low: think 0.25% or less.
On one end of the spectrum we have the Vanguard Total Stock Market Index, which represents practically the entire stock market within its portfolio, and bears a microscopic annual expense ratio of just 0.05%. The downside is you'd need a minimum of $10,000 to invest in this mutual fund.
For an investor working with $1,000, I'd encouraging you to more closely examine Vanguard's Target Retirement Funds. These investment vehicles have $1,000 minimum deposits, and they invest in other Vanguard funds based on your expected date of retirement. Best of all, the expense ratio of Vanguard's Target Retirement Funds are 74% below the average of their peers.
"How to invest in stocks with only $1,000?" isn't an impossible question to answer if you have these investment tools at your disposal.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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