With the recent cataclysmic events on Wall Street still unfolding and reverberating across the planet, interest in what goes on on the stock market — even for those who haven’t got a clue — has risen. Whether you’re a complete novice at this; or have an inkling or experience in how the money / stock markets work, this article will aim to show you the best way to invest small amounts of money and how that ‘little’ initial investment can grow and benefit you long-term, even when you’ve only got $20 to put away right now.
$20 may not sound like much but you can use it to buy shares in Johnson & Johnson, Intel, or even Harley-Davidson. And there are over 1,000 options available; and when you’ve got $100 or more to invest, your options are even greater. Now let’s take a closer look at the mechanics of investing small, large and medium amounts of cash.
Let’s start with $20. Is it really worth investing such a pittance? Well, indeed! And one way to do that, cheaply, is through Dividend Reinvestment Plans (DRPs), also known as Drips. DRPs and Direct Stock Purchase Plans (DSPs) allow you to bypass brokers — who charge commission — by buying direct from the companies you want to invest in, or via their agents. There are over 1,000 major corporations offering these types of stock plans, many of whom don’t charge a penny, or when they do, usually the fees are low enough to make it worthwhile to invest as little as $20 or $30 at a time. Ideal for those who are starting out with small amounts to invest, Drips will enable you to purchase frequently. In fact, once you’re in the plan you can set up an automatic payment plan without even having to buy a full share each time you make a contribution. If you can only invest small amounts of money every month, Drips, no doubt, may be one of the surest, steadiest ways to build wealth over your lifetime.
If you have a couple hundred bucks to invest, however, you may want to consider investing it in an index fund that tracks the S&P 500 (which has traditionally returned about 10% per year). Low minimum index funds that require as little as $250 — usually restricted to IRAs (Individual Retirement Accounts) for you to call yourself an owner, will allow you to add as much money as you like, as frequently as you like, after your initial investment with no additional costs or commissions. You simply purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman. If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified 500 companies portfolio.
What can you do with a grand?
What would be the best way to invest $1,000-plus? Well, if you open up a discount brokerage account, and can scrape up an additional $1,000 a year to add to your original investment; and let’s say you’ve got 40 years to retirement, if you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you’re ready to retire at age 65, you’ll have $532,111.07. Wouldn’t that seem worth it? And if you set-up a Roth IRA, you won’t even pay tax on that $532K when you withdraw it!