Many investors who are just getting started don’t have a lot to invest. Hopefully one can find $200 per month or so to put away, but even that can be difficult on many budgets. With any investing, consistency is at least as important as selection of investments, and regular investments – even if it is only $50 per month – can add up over time.
As a rule of thumb, you need at least $2000 at a time to invest in individual stocks. That would allow you to buy 100 shares of about an $18 stock. I wouldn’t buy fewer than 100 shares, unless it was for a child’s account, and wouldn’t buy stocks that trade for less than about $10 per share, so something like $1000-$2000 is needed before you can buy individual stocks. And then, you would be buying shares in one stock at a time, which would be fairly risky, although with only a small amount of money.
There are really three choices for investing smaller amounts:
1. Save up and invest when you have $2000 saved. The first choice is to simply deposit the cash in a money market or savings account and then invest when it builds up enough to purchase 100 shares or so. At $200 per month, this could allow shares to be bought about once per year. In this case, the strategy would be to have about five stocks on a watch list and then buy 100 shares of the stock that has the best prospects and price when $2000 or so is saved. This would take a lot of time, but in 20 years you’d have something like a $100,000 portfolio.
2. Invest in a mutual fund. It will normally take an initial $3000-$5000 investment, but once that is made most mutual funds will allow you to send in cash in small amounts. To get the most “bang for your buck,” index funds are recommended since they have the lowest fees and will beat the majority of managed funds over time.
3. DRIP, DRIP, DRIP. Many large companies that pay dividends have Dividend Re-Investment Plans, or DRIPs. These allow shares to be purchased using dividends from the company. Many companies also allow small amounts of money to be sent in to buy additional shares for a minimal fee. There are a large number of companies that offer DRIPs, but they tend to be the larger, more established companies and not the smaller, faster growing companies.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.