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Investing

How to invest small amounts of money

Everyone has to start somewhere, right? If you’re anything like me when I started investing, you may be wondering if it even makes sense to start investing now (which I think it does) and if it is even possible to invest small amounts of money. While some types of investment have a very high threshold to get started, there are still many opportunities for you. In this article, I will share some things you might want to consider.

What can you invest in?

Many investment opportunities don’t have a minimum amount required to get started, like buying stocks, cryptocurrencies or even precious metals, and for some investments this amount can be relatively small, like funds and bonds. This really surprised me at first. So where is the catch?

Fees

While it is often possible to start investing even very small amounts of money, the fees you pay may be disproportionally large depending on the broker you are using (“a broker is a firm or individual” which you need to buy stocks – more on Investopedia).

Stocks (and Bonds)

Standard fees for buying stocks are around $5 per order, which means buying or selling a stock, plus an additional 0.25% of the order value.

Let me give you an example. If you want to buy a stock for $100, you would pay

$100 + $5 + (0.25% x $100) = $105.25.

And then you would have to pay an additional $5 for selling the stock. This $5 fee really adds up, especially if you make many small orders. Fortunately, there is a way around that. In this article I compare the cost and service of different brokers. Some of these brokers don’t have any fees at all! You still have to pay the spread, though. Another way to buy a little bit of many different stocks at once without having to pay a fee for each stock are funds.

Investment funds

Funds are basically a collection of stocks chosen by different criteria. Funds have different types of fees. There are management fees, which you pay annually and are usually around 1 to 2%. Then there may be additional fees for buying that fund or fees depending on its performance. This really depends on the individual fund though. Generally speaking, ETFs (exchange traded fund) are cheaper. Sometimes there are also special offers by brokers to buy funds at zero initial costs.

Fractional shares

Usually, you can only buy whole shares of a company. Stocks of a company can have theoretically any price, like Nokia at currently $3.15 per share or Amazon at a share price of $1955.98. However, this generally does not say anything about the company, because the number of outstanding shares is also variable. The market capitalization, or how much the whole company is worth, can be calculated like this:

Market cap. = share price x number of shares outstanding

The problem with this is that you usually cannot buy any shares in a company like Amazon if you don’t invest at least $1955.98. One way around that is to buy a fund which invests in Amazon, but then you automatically buy all the other stocks in that fund. But recently, some brokers like Robinhood or Freetrade also offer fractional shares, which means that you can invest an arbitrary amount into any company or fund.

How to invest

To make any investment, you need a broker. Almost every bank is also a broker, but you can also go with a fintech startup. You can find a broker comparison here. After you register for an account, you just deposit money into your brokerage account via a wire transfer, choose what you want to invest in and how much. That’s pretty much it! The exact process depends on your broker and you can also find more detailed instructions there.

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