So you want to start investing in stocks but you don’t have a lot of seed money? Don’t be intimidated. It’s not as expensive as you think to get into the stock market. It’s entirely possible to begin investing in stocks without a fortune in your back pocket.
These days, anybody can open an account with a brokerage and start investing with a small sum of money. But first, it’s a good idea to learn a few things about stocks and how they work. This is not meant to be a comprehensive resource on the stock market. Speaking with candor, the stock market can be very complicated. Some would argue that it’s actually designed that way on purpose to favor wealthy investors over the little guys like us.
So we do recommend taking the time to educate yourself more deeply about the idiosyncrasies that can make the stock market an occasionally daunting place to explore. For a more detailed look that includes key terminology on investing and answers to a few of your top questions, check out our look at How to Buy Stocks.
But for those who are just looking to jump in with a few dollars and learn the ropes, what follows is a step-by-step quick-start guide. Read on and check out these ten steps for getting into the stock market with a small budget.
1. Learn the basics about stocks
So what are stocks? How do stocks work? There are a few basics you should understand before you start investing actual money. Take a little time to educate yourself on the actual meaning of an investment in a stock or fund. In the simplest terms, buying a stock means that you’ve purchased a share of ownership in a specific “publicly traded company.” A publicly traded company is one in which ownership is distributed to members of the public through public trading forums. These trading forums are called stock exchanges. A great deal of trading takes place on major exchanges like the New York Stock Exchange (NYSE), NASDAQ, the Shanghai Stock Exchange (SSE), the London Stock Exchange (LSE), and many others.
When a company is publicly traded, members of the public like us have the ability to buy shares. This makes us shareholders. NerdWallet explains that, as a shareholder, “you’re hoping the company grows and performs well over time. When that happens, your shares may become more valuable, and other investors may be willing to buy them from you for more than you paid for them. That means you could earn a profit if you decide to sell them.”
In the simplest terms, this is how you can buy and sell stocks. So a great way to begin your stock market education is to research companies that might interest you. Look for companies with innovative ideas, ethical principles that mirror your own, or just a few companies with a steady history of good performance. Bear in mind that the cost of a single share in a very successful company could cost many thousands of dollars while a new and virtually unknown public company could offer stocks for a few dollars a share.
2. Create an investment budget
Naturally, the stocks that you purchase will be determined in part by how much money you actually have to invest. You’ll want to determine how much you are prepared to spend in advance. If you do plan to make investing a regular part of your budget, it’s a good idea to anticipate putting aside a specific sum of your monthly budget toward stock investment. Even if this is a modest sum, investing with regularity is a great way to learn how the stock market works while building toward bigger goals in the long run.
The first factor determining your monthly investment budget should obviously be your financial situation. Invest only what you can afford to. Do not invest to the detriment of meeting your current financial obligations. Design a budget that works within the scope of your income, monthly household budget, savings, debt obligations, and your current lifestyle expectations.
You may be concerned about getting started with a small budget. It’s true that a modest sum can limit your options in a few ways. For one thing, the cost of a single stock is highly variable. At the top of the chart is Berkshire Hathaway (NYSE: BRK.A). At the time of writing in April 2022, a single share of ownership in this real estate giant will cost you well over $500,000. By sharp contrast, you can own a share in Apple (NASDAQ: AAPL) for under $200, or a share in American Airlines (NASDAQ: AAL) for under $20. Many accounts offer ways for you to buy smaller fractions of stocks, which could be a good way to explore the price movement on notable stocks on a small budget.
The easiest way to invest a small fraction of money into a wide array of stocks is to invest in an Exchange Traded Fund or a Mutual Fund. These funds are large collections of stocks. As an investor, you can buy shares in a mutual fund, which will ultimately make you a shareholder in a wide spread of companies selected by your fund managers. We’ll discuss the distinctions between stocks and funds in greater detail in a later section.
There is one other important factor when it comes to determining your monthly investment budget—the cost of your broker. Some online brokers require a minimum threshold for investing that might be as high as $1000. The good news, though, is that the market has produced a growing number of options for newer or more modestly financed investors.
As U.S. News & World Report explains “Discount brokers are a boon for beginners with little money who are often looking to get stock market exposure with smaller portfolios. But a discount broker typically does not provide advice or analysis. Many of these brokers don’t require a minimum amount to start an account, while some have a low beginning threshold of $1,000.”
3. Choose an account type
This takes us to our next step—choosing a brokerage account. There are numerous accounts offered by discount-level companies—those designed for affordability, accessibility, and even education. The Motley Fool points to companies like TD Ameritrade, E*Trade, and Charles Schwab, all of which make it quick and easy to open a new trading account and get started. Each of these companies also makes it easy to get started online.
There is another important consideration as you decide which type of account is right for you. You can choose between a traditional investment account or a robo-advisor.
NerdWallet says “Robo-advisor services provide complete investment management: These companies will ask you about your investing goals during the onboarding process and then build you a portfolio designed to achieve those aims. This may sound expensive, but the management fees here are generally a fraction of the cost of what a human investment manager would charge: Most robo-advisors charge about 0.25% of your account balance. And yes — you can also get an IRA at a robo-advisor if you wish.”
The robo-advisor may be a good option if you’re just learning the ropes. This is a great way to make some smart investments while learning how to prioritize your investment decisions.
4. Understand the differences between stocks and funds
Before making a purchase, you should know what you’re buying. Primarily, this means you’ll need to know the difference between stocks and funds. Stocks refer to shares in specific companies. This is a good way to invest if you truly believe in a company and see its potential for growth. A company that experiences success and growth could reward you with a high-return investment. When you invest in a single stock, be prepared to experience potentially dramatic swings in value as events impact both the company and the larger marketplace.
Funds such as mutual funds and exchange-traded funds are actually collections of stocks. When you invest in a mutual fund, you are buying small fractions of many different stocks. This is often viewed as a better strategy for long-term investment growth because funds are not as vulnerable to the same dramatic swings in value as are individual stocks. While funds will also fluctuate with changes in the economy and the marketplace, they will not be as deeply impacted by events within individual companies.
As NerdWallet says “Mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs are a kind of mutual fund that track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in a fund, you also own small pieces of each of those companies. You can put several funds together to build a diversified portfolio. Note that stock mutual funds are also sometimes called equity mutual funds.”
You should also be aware that the vast majority of financial advisors will strongly encourage you to focus on funds over stocks. You will experience less long-term volatility by investing the larger portion of your budget in these funds. NerdWallet says that a well-balanced retirement portfolio will see roughly 80% of your investment budget placed in funds. The majority of the remaining sum might be in bond funds, which are similar to ETFs but carry greater stability. In this equation, say financial advisors, individual stock investments should make up a small portion of your portfolio, especially as a newcomer to the market.
5. Eliminate Your Debt
Now that we’ve gotten some initial steps out of the way, it’s time to take a step back and prepare to maximize the effectiveness of your investment strategy. Simply stated, you must eliminate excess debt before you begin to invest. Any outstanding credit card balances that you carry from month to month should be addressed, as should burdensome medical bills, and debts that you are managing on an installment basis. Before you can truly begin to see value from your investments, you need to balance your own household budget, which starts with reducing the amount of debt impeding on your monthly finances.
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If you are already relatively debt-free, you can move on to the next step. If not, it’s time to reflect on how you are spending your money. High credit card balances can carry heavy monthly interest charges, the kind that can quickly eclipse the more modest gains you might see in the stock market. In other words, your household’s bottom line would be better served by first spending that money to reduce your debt. Once you have done this, you will be in a position to start benefiting from your investments.
6. Think about the future
What are your investment goals? Are you preparing for retirement? And if so, what are your retirement goals? What do you want your retirement to look like, and how much will it cost you to achieve this vision? These are all questions you’ll want to ask yourself as you move forward with your investment strategy.
But more importantly, you’ll want to take seriously that investment is about the future. You need to invest with the long-term outlook in mind. The proliferation of “high-frequency trading” may suggest that there is a great deal of money to be had in rapid-fire daily trading. But the truth is, these opportunities are generally realized by algorithmically driven computers processing enormous sums of data in fractions of a second. In other words, this strategy probably isn’t for you.
Your opportunities will come through patience. According to NerdWallet, “Stock market investments have proven to be one of the best ways to grow long-term wealth. Over several decades, the average stock market return is about 10% per year. However, remember that’s just an average across the entire market — some years will be up, some down and individual stocks will vary in their returns. For long-term investors, the stock market is a good investment no matter what’s happening day-to-day or year-to-year; it’s that long-term average they’re looking for.”
7. Don’t forget to invest through your employer
Speaking of looking to the future, says Investopedia,“If you have a 401(k) retirement account at work, then you may be investing in your future already with allocations to mutual funds and even your own company’s stock.”
Many employers offer a 401(k) plan, where you can automatically invest funds every time you receive a paycheck. A 401(k) is a fund-based investment account that comes with a number of benefits including relative stability, predictable long-term growth, and insulation against income taxes.
But the biggest benefit of beginning to invest with an employer is that many employers offer contribution matching programs. Here, your employer will match every dollar you invest into your 401(k) up to a certain limit. If your employer does offer a contribution matching program, you will want to take advantage of this opportunity. The more you contribute to your 401(k), the more your employer will contribute to your retirement goals. Double the investment in your future this way.
You can start with a modest sum, like 1% of each paycheck. But ideally, you would take steps to escalate this sum as your finances allow.
8. Be aware of commissions, fees and taxes
Nothing in life is free. Investing in stocks is no exception. Brokers have various different ways of charging you for the services they provide. This may come in the form of trade commissions, baseline fees or both. Make sure you understand the fee and commission structure dictated by each broker that you might be considering. You may also find that different fees or commissions apply to different types of financial products.
According to Investopedia, “In most cases, your broker will charge a commission every time you trade stock, either through buying or selling. Trading fees range from the low end of $2 per trade but can be as high as $10 for some discount brokers. Some brokers charge no trade commissions at all, but they make up for it in other ways. There are no charitable organizations running brokerage services.”
Look for a reputable broker that charges fair fees for the products that you anticipate investing in. And wherever you invest, make sure you understand the various tax rules that apply to different financial products. If you aren’t certain, this is a great time to speak to a qualified tax accountant or financial advisor. There are various different ways that you may be taxed on your investments. First and foremost, understand that there are taxes that apply every time you sell your stocks for a profit. Second, be aware that a number of different fund types—particularly retirement funds—will carry steep tax penalties for early withdrawal. Understand the rules and tax implications for every one of your investments.
9. Diversify your investments
On the subject of these varying investments, most financial advisors recommend a strategy called diversification. As the term implies, it is advisable to carry a diverse stock portfolio, one that offers both opportunity and insulation in equal measure. According to Investopedia, diversification is one of the best ways to protect yourself against unforeseen events in the market. Invest in a broad range of assets and financial products. This can offset the danger that one underperforming asset might drag down your entire portfolio. On the subject of diversification, Investopedia notes that “This is where the major benefit of mutual funds or ETFs comes into focus. Both types of securities tend to have a large number of stocks and other investments within their funds, which makes them more diversified than a single stock.”
10. Actively manage your investments
The other way to both seize opportunity and protect yourself against serious loss is to become an active, engaged and educated trader. Understand first and foremost that the market will undergo volatility. The value of your investments will rise and fall. And when it comes to long-term investments like your retirement funds and exchange-traded funds, patience is your greatest virtue. In spite of short-term market volatility, the long-term will ultimately yield gains.
But there is a balance. NerdWallet advises checking in on your investment goals and strategies a few times a year. Use these check-ins to evaluate your approach. Are you invested broadly across enough different industries? Is your balance between funds and individual stocks appropriate based on your goals? Is it time to rethink and maybe even raise your budget?
Take some time to address these questions every few months and be sure that your investment strategy remains targeted to your personal objectives.
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Again, this is not an exhaustive guide to investing by any means. But these ten steps can help you get started on a limited budget. And with practice, education, and savvy financial planning, these investments could help you achieve the future you envision.
Speaking of which, as long as you’re thinking about investing, that means you’re also ready to start thinking about retirement. After all, it’s never too soon to start planning for the future. To learn more, check out How to Start Planning for Retirement.