Like anything in the financial world, investing in the market comes with its fair share of risks. Additionally, it can be costly to invest consistently in the market. However, that doesn’t mean investors can’t begin their journey in the stock industry on a budget.
While many popular stocks come with shares that cost hundreds or thousands of dollars to acquire, investors can begin their stock forays while on a tight budget. There are ways to invest small amounts of money into the stock market and see promising returns.
1. Use Fractional Shares
Instead of buying full shares of company stocks that will cost you a significant amount of money, investors can purchase partial shares of a company’s stock instead.
Fractional shares allow investors to purchase small amounts of a company’s stock for as little as $1. These shares typically result from stock splits, meaning that there aren’t always an even amount of shares among investors.
Additionally, fractional shares aren’t commonly traded on the open market. Instead, investors must sell their fractional shares through a major brokerage to attract satisfactory returns. Also, different brokerages have contrasting rules about which companies can be invested in and how plausible fractional shares in those companies are.
Investors must check with their brokerages to determine whether fractional shares are available. More brokerages are making fractional shares available to stock investors.
That said, fractional shares are worth investing in if investors want to invest precise amounts of money in a company. These shares also make it easier for investors to diversify their portfolios because investors can purchase different stocks for less than the price of buying one full stock.
Investors can also buy dividend stocks and exchange-traded funds (ETFs) as fractional shares. For dividend stocks, the amount of money that an investor receives in dividends is proportional to how much of the share the investor owns.
Meanwhile, dividend reinvestment plans (DRIPs) allow investors to own fractional shares and receive dividend payments. When shareholders sign up for DRIPs, they receive the dividends and use them to purchase new shares, consistently reinvesting their dividends into the company offering the shares.
Investors can invest in high-priced stocks like Apple Inc. by putting down a few dollars for a fractional share of the company instead of paying the price for a full share of the company, which hovers around $180.
Investors can access fractional shares through stock splits, with each share of a stock split up into multiple shares. With a stock split, a company has better control over its share price. Should the share price be too expensive for an investor to purchase, it’s detrimental to the company and its value.
With stock splitting, companies can reduce the per-share price of stocks without compromising their value. Plus, they can do stock splits by any ratio.
2. Turn to Index Funds
Index funds are another way for stock investors with a limited financial outlay to get involved in the market immediately. These types of funds are large collections of stocks, bonds, and other securities, tracking particular stock market indexes such as the S&P 500 or the Dow Jones Industrial Average.
Investing in index funds can be advantageous to stock market investors because they allow investors to only put in money they can afford. Contrary to investing in individual stocks, investors don’t have to buy index fund shares when purchasing index funds. Investors can invest as much money as they feel comfortable.
Additionally, like with fractional shares, index funds provide strong portfolio diversification opportunities for investors. One index fund potentially provides hundreds or thousands of stock options. When investing in an index fund, investors are instantly investing in various types of stocks, enhancing the quality of their portfolios. Should some of those stocks underperform, the portfolio won’t be affected too much due to the variety of options available, allowing investors to further maximize stocks that are netting promising returns.
Index funds are types of mutual funds constructed to match and track financial market index components and follow their benchmark indexes regardless of the market’s state. Furthermore, this option for budgeting investors offers broad market exposure for investors and comes with low operating expenses and portfolio turnover.
If you’re nearing retirement age or considering how to raise funds for your retirement down the line, index funds are a savings haven for the latter years of life, allowing investors to put money aside when they need it post-career.
3. Trade in Commission-Free Internet Options
Investing in the stock market has become significantly easier because there are more avenues investors can enter the market through.
For investors on low budgets, the internet has afforded several ways for them to begin their stock investment journeys, allowing them to start investing with little upfront money. Investors can put in a small amount of money into a stock option as a way to test the market before making a more significant financial commitment.
There are stock options available that allow investors to begin investing with as little as $1 and without having to pay trade commissions, attracting newer generations of investors. In the past, brokers charged hefty commissions every time investors purchased stocks, making it expensive and difficult for investors to pour less than hundreds or thousands of dollars into a single stock.
With more commission-free options available for investors, the stock industry has been disrupted, forcing some major brokers such as E*Trade and Fidelity to do the same and shelve trading commissions.
Thanks to fractional shares, index funds, and trading commission-free stocks, investors have a wealth of reliable options to choose from when they want to start investing in stocks. These options give investors more control over how much they decide to invest and garner the kind of diversification they seek to enhance their respective portfolios.