How to Invest Your First 500 Dollars in the Stock Market
Do you think you are just too poor to invest in the stock market?
Maybe you are thinking you can’t make money in the stock market with only a small investment.
You could not be more wrong! Can you get your hands on $500?
I’m betting you can!
If necessary, collect aluminum cans, paper, and plastic for sale to a recycler, quit smoking or stop eating out. Just don’t tell me you can’t do it because you can!
Money is Tight
I understand, $500 is a fair chunk of change, especially these days. That’s why I’m going to show you how to invest and grow that money in the stock market.
The object of investing is to grow wealth and outpace the rate of inflation. It follows that you must seek investments offering the greatest growth opportunities, but here’s the rub! Usually, the greater the growth/income potential of the investment, the greater the risk you incur. This is the basis for the oft heard phrase “risk vs. reward.”
Sound investment requires a balance of risk vs. reward and frankly that is difficult to accomplish when you only have $500 to invest. That’s why I recommend that, initially, you invest in Mutual Funds or Exchange Traded Funds.
The reason is simple. For example, your $500 would buy you just one share of Apple, Inc. (AAPL). You certainly won’t have a diversified portfolio if all it holds is a single share of Apple. The success of your investment must not rely on the performance of a single stock. You can achieve diversification by investing that $500 in a mutual or exchange traded fund.
Depending on the fund, you may be in a position to buy several shares, but for the purposes of diversification, you are automatically diversified … even if you own just a single share!
Now You Need a Broker
You can find several online brokers out there, but for the novice investor with limited funds, E*Trade is one of the best. E*Trade offers commission free ETF trading and competitive fees for other trades. It is currently the only online broker with a $500 account minimum. Other brokers want $1000 and up to open an account. You can contact E*Trade by phone at 1-800-387-2331 or on the Web at www.etrade.com.
Ready, Set, Invest
Mutual funds hold a group of stocks (this gives you diversification). When you buy a share in a mutual fund, you are buying a piece of several stocks. Exchange traded funds, commonly known as ETFs, also offer diversification. One example of an ETF is the “spider.” This exchange traded fund has a ticker symbol of SPY and is a composite of all the S&P 500 stocks. There’s that diversification again! Another popular Exchange Traded Fund is the Diamonds, which tracks the 30 stocks of the Dow Jones Industrial Average.
Invest for the “Long Haul”
Keeping your investment in the stock market long term is the best way to ensure your returns. Jumping from one stock to another is not a safe play for the amateur investor. Holding your investment long term has proven to be the best strategy.
In the wake of the financial crisis, the stock market lost almost half its value, but those who held on saw that value return and in many cases increase over the past several years.
A share of SPY purchased one year ago for $129.11 is worth $144.82 today. That is a gain of $13.11 in just one-year. No savings account at your local bank will give you a return like that. This is why you should invest in mutual and exchange traded funds.
But the Risk…
I can’t deny that there is an element of risk. Equally undeniable is the fact that investing your money in no risk or low risk investments will get you precious little in the way of returns.
I’ve shown you that investments offering diversity are safer. We’ve discussed the fact that “time” is your best friend in the stock market and given you a concrete example of real gains from a specific investment.
If you want complete safety, I’m here to tell you it does not exist. Even if you put your $500 in a savings account insured by the Federal Deposit Insurance Corporation (FDIC), you will lose money. Why? The rate of inflation is greater than the rate of interest you will earn on the account. Five or even ten years down the road, that $500 will not have the purchasing power it had when you deposited it in the savings account even when you include the interest you earned.
Just Do It
Take your $500, open a brokerage account at E*Trade, choose a mutual fund or an ETF and put your money to work!
I like feedback from my readers. Have any of you invested in mutual funds? ETFs? Please share your thoughts.