You needn't wait until you come up with hundreds or even thousands of dollars before opening an investment account. In the past, it was almost a requirement to have quite a bit of money available to make your initial investment in a mutual fund or open a brokerage account.
Today, things are quite different. You can start investing with very little money upfront. Here's how.
Key Takeaways
- Invest through a direct purchase plan, which lets you buy stock straight from a company and avoid brokerage commissions.
- You can also use an online brokerage or investing app to invest small amounts of money over time.
- Buying ETFs will give you exposure to multiple stocks with one purchase.
- Consider no-load funds that have low investment minimums, which may be easier for you to afford.
Direct Stock-Purchase Plans
If investing in individual companies is your goal, you might want to consider direct purchase plans or "DPPs" for short. As their name suggests, you purchase these stocks directly from the company. There’s no brokerage account and no middleman, and you work directly with the company that issues the stock. One drawback is that not every company offers a DPP, so you may be somewhat limited in your selection.
Companies seldom promote their DPPs, so it’s up to you to find them. You'll probably have to spend a little time visiting a company’s website and looking through their investor relations section to determine whether or not it offers a direct purchase plan and how to get started.
The real benefits of a DPP are that you aren’t paying a hefty commission to a broker, and you’re given the ability to purchase fractions of shares. For example, suppose a company you want to invest in is trading at $100 per share, but you only have $50 to invest at the moment. Through a DPP, you can usually buy just half of a share, and then you could continue to use small amounts of money to purchase more shares over time. You can’t do that with a traditional broker.
Online Brokers and Investing Apps
A second way to start investing with a small amount of money is to sign up with an online discount broker. Today, many online brokers offer commission-free trading in ETFs, and you can create an automatic investment plan that will help you start building your portfolio over time. Keep in mind that they may impose some account restrictions and fees, but generally speaking, it’s a great way to start investing today without much money.
Another option is to use one of the investing apps that are currently so popular on the market. These apps work differently—some let you round up the change from purchases and invest the difference, while others allow you to invest in fractional shares—but they share a common goal: to help investors build a diversified portfolio with the money they have at hand, with a simple click on an iPhone or iPad.
Like online brokers, investing apps can charge service and maintenance fees. The investment choices offered can vary widely; some allow you to invest in predetermined portfolios of exchange-traded funds, while others offer individual stocks. Remember that these individual investments may carry fees. If you're looking for an investing app to get started with, here are a few to consider:
These apps also have different minimums for getting started. For some, the minimum is $0, but others may expect you to start investing with $100 or more, so choose the app that fits your budget and ability to invest.
Invest in ETFs
Are you thinking of investing in something like a mutual fund so that you can achieve instant diversification? If you don’t have a high initial deposit to make it happen, you may want to consider buying shares of an exchange-traded fund. Unlike mutual funds, which may impose a minimum initial investment, ETFs trade like stocks. They have a specific share price and can be purchased through virtually any broker. With an ETF, you can buy just a couple of shares as long as you have enough money to buy them.
ETFs don’t come without drawbacks. For one thing, you have to purchase whole shares. Second, you’ll typically pay a trading commission each time you make a trade. Since commissions can generally run anywhere from $4.50 to $11, they can quickly eat into your investment. If you purchase ETFs less frequently and with slightly larger amounts of money, you can keep your transaction costs down.
Fund Companies Offering Low Minimums
One of the biggest and best-known no-load fund companies out there is Vanguard. For most of it funds, a $3,000 minimum investment is required, just to get started. Many people could take nearly a year to save up that kind of money if they are investing for the first time, and that is only to purchase one single fund. Vanguard isn't alone, and most of the major fund companies have steep initial investment minimums.
Luckily, there are some other no-load fund families out there that cater to new investors and don’t impose such high limits. For example, you can check out Charles Schwab, which offers a low $100 minimum on its no-load funds, and T. Rowe Price, which doesn’t have a minimum on investor-class funds if you open an account with the company. These are two great low-cost fund families that make it easy for a new investor to get started with even a small amount of money.
As a seasoned financial expert with a deep understanding of investment strategies, let's delve into the key concepts highlighted in the article about starting investments with limited funds.
1. Direct Stock-Purchase Plans (DPPs):
- DPPs allow investors to buy stocks directly from a company, eliminating the need for a brokerage account and reducing brokerage commissions.
- Investors can purchase fractions of shares through DPPs, enabling them to invest with smaller amounts of money.
- The drawback is that not all companies offer DPPs, and finding information about them might require visiting the company's website and exploring their investor relations section.
2. Online Brokers and Investing Apps:
- Online discount brokers provide commission-free trading in ETFs, allowing investors to start building portfolios over time.
- Investing apps, such as Robinhood, Acorns, Axos Invest, M1 Finance, and Stash, offer various ways to invest with small amounts, including rounding up change from purchases and investing the difference or buying fractional shares.
- Both online brokers and investing apps may have account restrictions and fees, so investors should be aware of the terms.
3. Investing in ETFs:
- Exchange-Traded Funds (ETFs) provide instant diversification and are traded like stocks.
- Unlike mutual funds, ETFs may not impose a minimum initial investment, and investors can buy just a few shares with the money they have.
- However, investors need to be cautious about trading commissions associated with ETFs, as they can impact overall returns.
4. Fund Companies Offering Low Minimums:
- Vanguard is a well-known no-load fund company but requires a $3,000 minimum investment for most funds.
- Other fund companies like Charles Schwab and T. Rowe Price cater to new investors by offering lower minimums, making it easier for individuals with limited funds to get started.
In summary, the investment landscape has evolved, and individuals can now enter the market with smaller amounts of money. Whether through DPPs, online brokers, investing apps, ETFs, or low-minimum fund companies, there are diverse options available to kickstart your investment journey without the need for substantial initial capital.
