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How To Invest With Little Money

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

Investing is difficult. There are many myths behind the concept of investing. One of the largest myths people believe is that you need a large amount of money to invest. This is not the case at all. You can always invest with a modest amount of money, even less than modest. In this post I will explain how to invest with only a little money.

Peer-To-Peer Lending

Peer-to-peer (P2P) lending is the practice of lending money over a network. People can use these for many situations from car loans to business loans. You can loan money to borrowers of various risk, but the loans are generally risky. People use P2P lending when they want to loan and borrow money outside of traditional methods. So keep in mind there are many fees and relatively high APRs relative to other loans.

Unlike many other forms of investments, P2P lending only requires a minimum as low as a thousand dollars. Lower risk borrowers can have a return of investment of around 8% so you can expect at least modest returns. This is a risky investment though. Defaults happen and P2P lending is generally not regulated. This may not be the best investment to make if you are getting started, but a potent investment that requires little money that many people may turn to during tough times. Many traditional banks and lenders have increased their requirements and minimum credit score for certain loans due to the Coronavirus Crisis so P2P lending could easily rise as an alternative.

Exchange Traded Funds

Exchange traded funds (ETFs) are groups of assets including stocks, bonds, and commodities. They are much like mutual funds. One of the most solid differences between the two is that mutual funds only change their price after a day in the market. In other words, mutual funds only have one set price during a day so you can only buy or sell it at that price towards the end of the day. An ETF is designed to be traded like individual stocks. Like stocks, an ETF price can change throughout the day. You could buy an ETF at a certain price at a certain time and 15 minutes it could be a different price. ETFs can be purchased at a single share, sometimes at less than $100.

However, I am yet to buy an ETF, I have invested in many mutual funds though. So why do I not invest in ETFs? Well, first I already have numerous options that allow me to invest money in a variety of funds. Second, many of the mutual funds provided by some brokers tend to have lower expense ratios than the ETF equivalence or about equal. Third, many brokers provide ETFs, but there are many popular ones that exist outside their platform. While you can buy these ETFs via your broker there will likely be third-party fees. I have seen disclaimers on many brokers that claim that. I have no idea how expensive these fees are and I have no intention to.

If you have only a little money to invest, an ETF that is not from your broker could easily erode you investment. It may not be worth it then. However, there are many quality ETFs provided by the most popular brokers including Vanguard and Fidelity. They do not pay me to say this, but if you want to invest only a small amount of money then ETFs may be the way to go.

Individual Stocks

With most brokers, you only need to buy a single stock at the price of a share. These prices can vary, but you can invest in many quality companies for less than $100. Some of these companies may be blue chips which have relatively low risk.

But what if you want to invest in some of the largest companies? Amazon’s stock price is over $2,000 and I do not see it going much lower in the near future. Believe it or not, but Amazon is not the most expensive stock. Berkshire Hathaway costs hundreds of thousands per share. If you have enough money to buy a single share of Amazon you are just a little short of the $3,000 minimum for many if not even most mutual funds. If you have only a little money and want to buy Amazon you would be incapable of buying them with at least some brokers.

Many brokers now provide fractional shares. You can now buy Amazon for as low as a few dollars, granted for less than 1% of a share depending on your broker. However, many of these brokers have fees, some of which can erode your small investment considerably, depending on the circumstance, maybe even fully. Others have different requirements including frequenting those investments. This likely means you should already be invested in these companies before you can buy a fractional share.

Problems With Fractional Shares

If you want to own fractional shares you should note some issues. Fractional shares do pay out dividends, but they never pay out a fraction of a cent. Let’s say you own a 1% share of a company that pays out $0.99 cents per share. The fractional share would technically give you a dividend of $0.0099 or less than a penny. However, if your dividend is less than one cent from a fractional share you do not receive the dividend. They do not even accumulate those dividends, not yet at least.

In addition, fractional shares are purchased from the broker, not a stock exchange. In other words, the price is not regulated as well as they are on exchanges so you could easily pay more for a fractional share than the percentage of the price of a share. Even if the fractional share does not have a higher price, there could be fees.

Furthermore, fractional shares cannot easily be rolled over to other brokers. If you want to start at a different broker you can, but you will likely have to leave behind your fractional shares. This is especially troublesome if your broker is facing financial hardships or possibly even bankruptcy.

401ks

I know I have brought up some shortcomings of 401ks previously. However, one thing I have overlooked is that 401ks are great for starting out in investing or for small contributions. Plus, my employer automatically provides all employees with a 401k so technically speaking I am paying for it, so I might as well use it.

With it I have invested in funds for international equities, mid-cap stocks, and even REITs that I have not invested in with my Roth IRA. You cannot invest in more variety than that. If I wanted to do that in my Roth IRA I would have to invest $3,000 into each, around $9,000 total. Instead I could invest a minimum of $10 into any fund. This would be a good way to invest while you are working or starting out. However, there will be some restrictions, some 401ks only invest in a series of funds.

Final Thoughts

Unfortunately, we are facing unprecedented times right now. We are now in a recession and we could face another bear market or even a housing crash. These are volatile times. However, that also means that this is a time you could forge your wealth. You should find your balance of risk versus returns. But with unprecedented times comes less money. You may only have a little money to invest, but you only ever need a little money to invest.

However, if you lack savings or have considerable debt, now may be the right time to increase your savings instead of investing.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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