Contrary to popular belief, you don't need to be rich to start investing. Even if you have less than $500 to invest, there are some good investment ideas that only require a few hundred dollars to get started.
So whether you're trying to save for retirement, earn additional income or achieve some other type of savings goal, try your hand at investing. Here are six ways you can start investing with less than $500 -- and two ways to be prepared before you even start your small investments.
What to do before making small investments
While dabbling in small investments doesn't require a lot of money, it does require some financial healthiness and responsibility. Before you even consider how to invest with little money, you should first ensure your financial health in two ways:
- Build an emergency fund. Trying to invest without first having an emergency fund established is setting yourself up for failure, Paul Moyer of SavingFreak said. "As soon as a bad financial situation pops up -- a car repair, or a medical bill, etc. -- you are going to turn to that investment account to make up the difference." Don't sabotage your investments by failing to have an emergency fund.
- Pay off all high-interest credit cards. Before you look at how to start investing with little money, your cash is better put toward paying off credit cards that charge high interest rates. The sooner you pay off this type of debt, the less you'll spend on interest -- and the more you'll have to put toward your small investments.
Small-investment ideas to build your portfolio (and why they're smart ideas)
"The biggest decision you have to make is your tolerance for risk," Moyer said. "If you are investing for the long term (more than five years) then you can stand to take a little risk with mutual funds, ETFs, etc. If this is a short-term investment or you cannot afford to lose the money, then you need to look at something much safer, such as CDs, money market, or high-yield savings."
Let's take a look at some of the small investment opportunities available to get a better understanding of your options for growing your money.
1. Consider DRIPs or DRPs
A dividend reinvestment plan, sometimes referred to as DRIP or DRP, is a great small-investment option that offers investors the opportunity to buy stocks directly from companies without the use of a broker. These programs typically allow you to participate as long as you can afford to buy at least one share.
Some other benefits include:
- Dollar-cost averaging: You can invest a specific dollar amount -- say $10 or $25 -- on a monthly basis. By investing regularly, you're buying during all points of the market -- both when it's up and when it's down. This concept of dollar-cost averaging is key for long-term investing as it gives you a truer return over time.
- Dividend reinvesting: As the term suggests, dividends paid by the company are reinvested in your holding, which will allow you to buy more stock. Dividends are simply earnings that the company pays out to its shareholders.
- Little to no fees: There are DRIPs that don't charge any fees at all, though some do charge a small fee for ongoing contributions and dividend reinvestment.
According to Moyer, DRIPs or DRPs are the kind of cheap investments that can make a significant difference in your portfolio.
2. Invest in individual stocks
If you're wondering how to invest in stocks with little money, individual stocks could be an option for you. Through discount brokerage firms like E*Trade, TD Ameritrade, Scottrade, and TradeKing, you can buy individual stocks for a small fee of $5 to $10 per trade.
So if you have $500 to invest, that would leave you $490 to buy stocks that have a share price less than that amount. For instance, if a stock sold for $25 per share, you could buy 19 shares and become a small owner in that company.
For small-investment beginners, Moyer also recommended Loyal3, where investors can purchase fractional shares from their choice of over 70 different companies. Regardless of the share price, you can purchase as little as $10 of stock in companies like AMC, GoPro, and Virgin America.
3. Pick mutual funds
While many mutual funds require a minimum investment in the thousands, there are hundreds of mutual funds that will allow you to make an initial small investment of $500 or even less. A quick search through Morningstar's mutual fund screener revealed 200 different mutual funds that you can invest in with a minimum deposit of $500.
If you're looking for an even smaller investment, there were nearly 300 mutual funds from TD Ameritrade that required a $100 minimum investment, and more than 250 that had no minimum requirement at all.
Mutual funds are one of the best investment options for somebody who is just getting started. They allow you to be diversified -- so instead of owning one stock, you might own a few hundred -- and they're a great approach for long-term investing.
4. Choose exchange-traded funds
Another sound option for someone who's just starting to make small investments is Exchange-traded funds, or ETFs. Similar to mutual funds in that they have a collection of different investments, what sets ETFs apart is that they are traded like common stocks on a stock exchange -- and they offer a low cost of entry.
An ETF can be purchased for the cost of one share, making it an appealing option for someone looking for easy investments. Vanguard's best-performing ETF for the past 10 years is priced at just $129, meaning you can become an investor for just that much.
"If you can invest for the long haul and ignore the roller coaster, an ETF is a good place to start," Moyer said.
5. Start a business
"The biggest thing you can do as a small investor is know yourself," Moyer said. "If you are an entrepreneurial spirit, then that money is probably best spent on investing in you and your ideas to make money."
You can actually start a business with less than $500 to invest. There are options available for starting a blog with little to no money, and you can potentially start making some additional income immediately.
Even if you don't have $500 to start investing with, there are other creative, small-business ideas you can come up with: offer dog walking services, car detailing, child care or lawn maintenance. Each of these businesses will have various initial expenses, but most could be easily started by creating business cards and a few flyers. There are also many websites that are great for helping you earn side income, including TaskRabbit and Craigslist.
While starting a small business might not be in your comfort zone, it's certainly a solid solution for how to invest with little money.
6. Get social with peer-to-peer lending
Another one of the small-investment business ideas available is peer-to-peer lending, also referred to as P2P or social lending. This direct method of debt financing lets individuals borrow and lend money independently, without having to go through an official financial institution.
Through sites like Lending Club and Prosper, you can lend money to people who want to consolidate their debts, make home improvements, finance a car, pay for medical expenses and more. You'll get monthly payments of principal and interest as borrowers repay their loans. As of last quarter, the rate of solid returns to Lending Club investors was between 5.23% and 8.82%.
Regardless of how much you have to invest, there are small investment options out there for you. The important thing is that you get started as soon as you can. Use a few of these ideas, and start investing in your future now.
"Whatever you do, start investing as soon as you can, because time will be the greatest asset or liability you have," Moyer said.
Ruth Sarreal contributed to the reporting for this article.
- The 31 Best Banks of 2016
- 10 Best Online Banks of 2016
- How to Improve Your Credit Score by Negotiating With Creditors
This article originally appeared at GoBankingRates.
GoBankingRates has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro and TD Ameritrade. The Motley Fool recommends Virgin America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.