Hopefully that $2000 is just a start and putting away such sums will become a regular thing, rather than a one-time event. While there is nothing wrong with starting with $2000 or even less, growing wealth involves putting away money regularly. Rarely does one just drop a couple thousand in the market and hit it big – it just doesn’t happen.
That said, when investing you should look at whether it is more important to preserve capital or grow wealth. If you have a small amount to invest, you have little downside risk (assuming that the $2000 is not the rent money) and therefore growth of principle is more important than preservation of principle. One could put the money in five different mutual funds (if they’d accept such low balances) and grow the money at 5 to 10% per year, but even at 10% per year it would take 21 years for the money to be worth $16,000.
If all you ever plan to invest is $2000 (say you already have a 401K plan growing or a company pension and just have $2000 sitting around you want to invest) it therefore makes more sense to pick a single stock instead of a mutual fund (or set of funds). With the right stock (for example, Microsoft or Walmart when they were still small) your $2000 could grow into large sums in a relatively short period of time. If it does grow substantially, say to $10,000-$20,000 or more, you could start selling off some of the shares to diversify into other stocks or mutual funds.
When investing this way, you are looking for a particular kind of stock. In particular you want a stock that is 1)fairly young, such that there is plenty of room to expand, 2) has steadily growing earnings, 3) Has a share price that has been increasing steadily, 4) has little or no debt (this shows that the company has been run well), and 5) is well run in comparison to its peers. It is this kind of company that can be bought and put away into a drawer for many years while the company grows and the value of your investment increases. With $2000, your price range will be in the $10-$20 per share range (you’d want to buy at least 100 shares and have money left over to pay for brokerage fees, typically around $60.
Don’t think of it as a stock price – a number in your investment account. Think of yourself as a business partner, providing capital to a group of individuals so they can grow the business (since this is actually what you are doing). Evaluate different companies and decide of which one you want to become a part. Once you’re a part, expect some bumps along the way as your team works to make the business grow.
Don’t plan to be selling it anytime soon – growing a business takes time. Time is your friend. Holding will both reduce your risk that fluctuations in the market will result in a loss and delay the payment of capital gain taxes which will allow funds to compound. Just remember to never keep more into one company than you are willing to lose. If the stock shoots up and you could pay off your mortgage with the proceeds, it’s probably time to do so. Remember never to fall in love with a stock – just ask the folks who held large positions in GE, Enron, or Outback Steakhouse.
Hopefully, having bought some shares of a first company, you will want to save up another $2000 and buy more shares or shares in another stock. With time, perhaps putting $2000-$4000 per year away, you can amass a fortune that will allow you economic freedom in your later years.
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Disclaimer: This blog is not meant to give financial planning advice, it gives general information on wealth building, securities, investment strategies, and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not, who knows the whole financial picture of the individual. Any tax information discussed is what the author believes to be true but may not be correct. Consult a CPA for tax advice. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.