Updated February 24, 2024

How to Invest in Stocks with Little Money

By Jeremy Harshman
Read more about Investing
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Think you don't have enough money to invest? You can start with as little as $5. Read our top ways to invest a little money and start earning now.

Start investing with as little as $5. Here are five ways:

  1. Contribute to an employer 401(k)
  2. Use a robo advisor to automatically invest
  3. Buy fractional shares with a micro investing app
  4. Diversify with ETFs
  5. Find no minimum mutual funds

Start Investing, Even With Little Money

It's easy to talk yourself out of investing when you don't have much money to put up. But even a few dollars can go far.

If you've been sticking to savings accounts, you're not doing yourself any favors. These accounts offer next to nothing in interest, making them nothing more than a place to park your money.

Investing in stocks helps you save for the future. The average historical stock market return is 9.2%. The earlier you start, the more time you have for money to grow. Don't miss out on this just because you don't have a ton of spare cash.

If you are considering opening a brokerage account, you must check out these promotions.

The Myths About Investing

Your misconceptions about investing may be holding you back from saving for your future. Here are some common investment myths - and the truth about them.

  • Myth #1: You have to be rich to use a brokerage account.
    This is the most common myth. The truth is, there are now many brokerages with no minimum investment (or just very little). You can open an account with as little as just $1 and start investing.

    Brokerages like Robinhood, Ally Invest, and Stash all have no minimums to start. And apps like Acorns even let you invest your spare change.

  • Myth #2: You are restricted to penny stocks unless you have a lot of money.
    As a new investor, you DON'T want to invest in highly risky penny stocks.

    Penny stocks are stocks trading for less than $5. But they're priced low for a reason - the companies behind them may not last for much longer or they're just starting out.

    But, established company stocks are a lot more expensive. How can you afford Netflix at $500 a share, or Amazon at $3,000 a share?

    Enter fractional shares. This means you can buy just a tiny piece of a share if you don't have enough for a full share. Robinhood lets you buy stocks starting from just $1.[1] You can buy just $10 worth of Amazon stock if that's all you have.

    This lets you invest in well-known companies that you love and support. These companies are less risky and have a long history of steady performance.

  • Myth #3: You have to have enough money to buy a diversified portfolio.
    A diversified portfolio means investing in lots of different stocks. This reduces your overall risk because you don't have all eggs in one basket. But you may think that buying lots of stocks will require lots of money.

    This is not true. Again, with fractional shares, you can buy stocks from lots of companies. If you have $50, you can invest $1 in 50 different companies.

    Another great option is to invest in ETFs (Exchange Traded Funds). ETFs are a collection of stocks, sometimes up to hundreds in one. You can take $50 and invest in one ETF and instantly be diversified in hundreds of companies.

    Tip: ETFs provide new investors with instant diversification. Some stocks in the fund may do well and some may not. The risk is spread out.

    ETFs are purchased just like stocks on the open stock market. All brokerages offer ETFs.

  • Myth #4: Investing in mutual funds requires thousands of dollars.
    Mutual funds are a popular option for long term investing. They are a collection of professionally managed stocks, so you get a wide range of diversification. You can just buy into one and not worry about managing it.

    Traditionally, mutual funds require very large investments. But now, there are lots of mutual funds with no minimum required. Check out Fidelity's no-minimum mutual funds.

What is your biggest concern about investing?

Steps to Take Before Investing

Ready to invest? Before you start, give yourself a financial checkup first. You should be on solid ground before investing any money.

This means:

  • Pay off credit card debt. If you're not able to pay off your credit cards every month, the interest you're adding could negate any returns you'll make on investments.

    You're better off putting any extra funds toward your credit card debt than trying the investing route.

  • Set up an emergency fund. At a minimum, you should have $1,000 for minor emergencies. Eventually, you want to work up to saving 3 to 6 months' worth of income. This protects you against an unexpected job loss.

How much do you have saved for emergencies?

If you have credit card debt or little money in your savings account, investing may seem like a far-off goal.

But you can save $1,000 in one year with less than $100 per month. Every extra dollar you pay towards your credit card debt helps lower the interest you pay.

Stay consistent and you'll be ready to invest sooner rather than later.

How Much Money Do You Need to Start Investing?

Nowadays with micro-investing apps, you can start investing with as little as $1 to $5. Thanks to fractional shares, you can buy stocks in any company with just a couple of bucks.

Most brokerages have also eliminated trading fees, so you can make trades for free. Plus, most have no account minimum too. This really removes the previous high barriers to entry.

To start investing with little money, we recommend Robinhood, Acorns, and Stash Invest as the best apps for beginners. They let you start investing with $1 - $5.

How to Start Investing

Ready to start investing? Follow these steps to make sure you're investing wisely.

  1. Set aside some money
    Only invest money that you won't need anytime soon (ideally for the next 5 years). This is because you need time for your money to grow and to ride out any ups and downs of the market.

    The good news is that you don't need to wait until you have hundreds saved to start. You can invest just $10 every week if you want.

  2. Choose the right investment app
    As a new investor without a lot of capital, choose a micro-investing app that supports fractional shares. This will let you invest tiny amounts.

    Compare investing apps to see what feature they have. Find the app that fits your needs, or you may stop using it.

  3. Open an account
    When you're ready to sign up with an app, you'll be asked what kind of account you want to open. The most popular types of accounts are:

    • Taxable account: This is a general purpose investment account. You can withdraw funds at any time, so it's ideal for shorter term goals. There's no investment limit.
    • Retirement account: This includes Traditional and Roth IRAs. These accounts offer tax advantages, but there are early withdrawal rules and annual contribution limits.

  4. Know your goals
    What are you investing for? Knowing your goals will let you know how much risk you can afford to take.

    If you're in your 20s and 30s and are investing for retirement, you've still got decades ahead. You can take more risk and invest in more stocks.

    If you're already nearing retirement or investing for a short-term goal, then you can't be too risky. You'd want more bonds and other low-risk investment options.

  5. Do your research
    Before investing in a stock, do research to make sure it feels right for you. Understand the basics of the company and their financials, where it's headed, the leadership, and comparisons with competitors.

    We can't fully predict how investments will perform, but doing research ensure that you're not just investing blindly.

Have you ever bought stocks?

Options for Investing in Stocks with Little Money

New investors today have a lot more choices. Here are some simple options for investing in stocks with little money.

  • Employer 401(k)
    Never give away free money! That is exactly what an employer-sponsored 401(k) offers. If your employer provides matching contributions, this investment is a must.

    Maximize your contributions to take advantage of your employer's match. If you cannot afford the maximum contribution yet, try to work up to that point. Even a small percentage of each paycheck will build up over time.

    TIP: Set up automatic withdrawals to contribute to an employer-sponsored 401(k).

    You never see the funds since they are automatically deducted from your paycheck. You will not even miss the money.

  • Robo advisor
    Robo advisors automatically invest and manages your portfolio. You answer questions about your goals and they will find the right kind of investments for you.

    Betterment is a popular robo advisor. It has no minimum and you can deposit whatever amount you want. The Acorns app even automatically invests your spare change.

    In exchange for the service, most robo advisors do charge a small management fee. Acorns starts at $3 per month.[2] Betterment is $4 per month for balances under $20,000, and then 0.25% annual fee for balances of $20,000 or more, or if you set up recurring monthly deposits totaling $250 or more.[3]

  • Individual stocks with fractional shares
    Micro investing apps make it affordable to purchase individual stocks with fractional shares. For example, on Robinhood, if you have $20, you can invest $1 in 20 different stocks.

  • Exchange traded funds
    Exchange Traded Funds (ETFs) are a basket of stocks, bonds and other securities. This is a great option if you're looking for instant diversification. For example, a S&P 500 ETF contains stocks from the 500 largest U.S. companies.

  • Mutual funds
    Like ETFs, mutual funds are a collection of stocks, bonds and other financial holdings. Most mutual fund companies have investment minimums of $1,000 - $3,000. But Fidelity has a number of mutual funds with no minimum investment.

    Tip: Since ETFs and mutual funds contain a variety of stocks and bonds, they are a more diversified - and sometimes less risky - investment than stock in an individual company.

    Of course, this depends on the types of holdings of a particular fund - a more aggressive fund can still carry quite a bit of risk.

  • Dividend reinvestment plan (DRIP)
    DRIP is a program that lets you to buy stocks directly from a company (without a brokerage). These plans are usually offered by large blue-chip companies that pay dividends. Many companies don't charge any fees to participate.

    A lot of companies let you invest in their DRIP program with as little as $25. When your shares pay a dividend, the company will automatically reinvest the dividends, which helps your money grow faster.

Non-Stock Investment Options for Beginners

And finally, here are some options if you're looking for non-stock investments.

  • Real estate
    Real estate crowdfunding has made it possible for small investors to enter this sector traditionally reserved for the wealthy. Investors combine money to fund real estate projects together.

    If you have $500 to start, you can invest in real estate with Fundrise ($10 minimum).

  • Treasury securities
    If you want an investment with the lowest possible risk, Treasury securities are a good bet. These securities do not change with the market - they are predictable.

    Treasury securities are backed by the US government. Each security has its own maturity date ranging from a few days to 30 years. The minimum investment is usually $25 - $100.

  • Worthy bonds
    The Worthy investing platform allows you to invest in bonds starting from just $10 in each bond. It pays a fixed 7% return.[4] The bonds are used to offer loans to growing American businesses.

    You can cash out your money at any time. There are no fees or penalties to buy or withdraw.

Benefits of Investing with Little Money

Here are the benefits of investing little money:

  • Get in the habit of investing. Sometimes getting started is the hardest part. You think you cannot part with even $1 each week or month. This type of thinking is what prevents people from investing.

    If you start with just $5 or $10 and contribute regularly, you get into the habit of investing regularly. Down the road, you will likely find yourself wanting to invest more.

  • Grow your money. Investing offers more growth potential than if your money just sat in a bank account. Even if you only invested $20 every month, it can grow into $37,000 over 30 years (assuming 9% returns, which is the stock market average).

    So even if you only have a little bit of extra money, invest it now so your money has more time to grow.

    You can play around with numbers yourself with this compound interest calculator.

  • Not too much risk. Investing $5 or $20 isn't risking too much of your money, unlike investing large sums.

  • Gain experience. You'll get hands-on experience about the different types of investments, fees, processes, terms, and strategies. With more understanding, you'll feel more comfortable investing larger amounts later.

It's worthwhile to begin investing with little money. The earlier you start investing the better, no matter how little that money is, compounding, regular contributions, and time can build wealth.

Levi Sanchez CFP®, Co-Founder, Financial Planner at Millennial Wealth

Downsides of Investing with Little Money

There are also downsides to investing with little money.

  • Most likely won't get rich. Investing small amounts will also get you small returns. To really build wealth, you'd have to invest larger amounts. But that said, investing anything is better than nothing at all.

  • Long wait for a return on your investment. You need to plan for the long term. Don't invest money you may need in the next few months or year. Instead, invest money you won't miss in order to let it do its job and grow.

Investing Secrets for Small Investors

Investing can be fun but also stressful. As a new investor, it's easy to let your emotions get the best of you. This could lead you to make bad decisions.

Here are some smart investing rules to live by to build long term wealth.

  • Start early: When you start investing is more important than how much you invest. The earlier you start, the more time you have for compounding interest to grow your money. You'll be better off if you consistently invest small amounts early.

  • Don't try to beat the market: This means trying to predict the market movements and actively buying and selling at the best times. This usually does not work, and often leads you to make bigger mistakes.

  • Think long term: Instead, you'll have better success when you hold on to investments for long periods of time. Pick some good, solid companies and hold on to the stocks. There's no need to even check up on your stocks daily.

  • Diversify: Don't put all your eggs in one basket. For a well-diversified portfolio, you should have 15-20 different stocks. The good news is that fractional shares allows you to buy just a little of each stock. Or you can instantly diversify with an ETF.

How Taxes Work for Stocks

This may not be something you immediately think about, but it's very important to understand how you'll be taxed. A lot of beginners discover that taxes eat away at your profits quickly.

So let's briefly go over how taxes work for investment profits.

First, let's talk about taxable investment accounts (aka regular accounts). There are two types of taxes for investments:

  1. Capital gains:
    This is when you sell a stock and make a profit (i.e. the stock has gone up in price). The tax rate depends on how long you've held the asset before selling.

    • Less than 1 year: This is called short-term capital gains; they're taxed at your regular income tax rate.
    • More than 1 year: This is called long-term capital gains. The tax rate is less - either 0%, 15%, or 20% based on your income.

    As you can see, you can greatly reduce your taxes by holding onto your investments for longer.

  2. Dividends:
    This is rewards paid (usually in cash) to shareholders. Dividends are taxed according to whether they're qualified or non-qualified.

    • Qualified dividends are taxed at the long-term capital gains rate.
    • Non-qualified dividends are taxed at your regular income tax rate.

If you have an IRA account, your capital gains and dividends grow tax-free before withdrawal. For a traditional IRA, you will be taxed at your income tax rate when you start withdrawing funds after age 59-1/2. But for a Roth IRA, even your withdrawals are tax-free.

Your brokerage will provide you with tax forms at the beginning of each year, so you don't need to worry about keeping track of those yourself. Common forms you may receive are:

  • 1099-B for capital gains and losses
  • 1099-DIV for dividend income
  • 1099-INT for interest income
  • 1099-R for distributions from retirement accounts

What the Experts Say

CreditDonkey asked a panel of industry experts to answer readers' most pressing questions. Here's what they said:

Bottom Line

Everyone should invest at some point. The sooner you begin - even with just a few dollars - the quicker you can grow your funds. By investing small amounts, you don't need to wait until you have more money.

Remember to be patient and don't get discouraged. Your money won't grow too quickly with small investments. But with regular contributions and time, you'll be on your way to building wealth.

Don't invest if you have a large amount of credit card debt or don't have the start of an emergency fund going.

References

  1. ^ Robinhood Support, Fractional Shares, Retrieved 12/18/2020
  2. ^ Acorns Pricing, Retrieved 12/18/2020
  3. ^ Betterment. Pricing, Retrieved 12/03/2023
  4. ^ Worthy Bonds, How It Works, Retrieved 12/18/2020

Jeremy Harshman is a creative assistant at CreditDonkey, a personal finance comparison and reviews website. Write to Jeremy Harshman at jeremy.harshman@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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