But before you jump head first into the world of stocks and bonds, there are a few things you need to consider. One of the biggest considerations for investors with a minimal amount of funds is not only what to invest in but also how to go about investing.
Not long into your investment journey you may find yourself bombarded with minimum deposit restrictions, commissions and the need for diversification, among a myriad of other considerations. In this article, we'll walk you through getting started as an investor and show you how to maximize your returns by minimizing your costs. What are the account minimums? To the inexperienced investor, investing may seem simple enough - all you need to do is go to a brokerage firm and open up an account, right?
What you may not know, however, is that all financial institutions have minimum deposit requirements. In other words, they won't accept your account application unless you deposit a certain amount of money. Stocks Stock brokers come in two flavors: As the name implies, a full-service broker provides much more in the way of service, but it only deals with higher net worth clients.
Discount brokers have considerably lower fees, but don't expect much in the way of hand-holding. There will be some discount brokers that will take you and others that won't. You'll have to shop around. You also could purchase shares directly from a company through direct stock purchase plans DSPPs. With the advent of online trading, there are a number of discount brokers with no or very low minimum deposit restrictions.
One of the most popular online trading sites is ShareBuilder. You will, however, be faced with other restrictions and see higher fees for certain types of trades.
Mutual Funds and Bonds If mutual funds or bonds are investments you would like to make, it is simpler in terms of minimum deposit amounts. Both of these can be purchased through brokerage firms, where similar deposit rules apply as stocks. If you want to purchase government bonds, this can be done straight from the government through TreasuryDirect.
Commissions Before you open an investment account, you must also consider the costs that you will incur from purchasing investments once the account is open. In most cases, every time you purchase an investment, it will cost you money through commissions.
Investing in stocks can be very costly if you trade constantly, especially with a minimum amount of money available to invest. Every time that you trade stock, either buying or selling, you will incur a trading fee. Remember, a trade is an order to purchase shares in one company - if you want to purchase five different stocks at the same time, this is seen as five separate trades and you will be charged for each one.
If your investments don't earn enough to cover this, you have lost money by just entering and exiting positions. Mutual Fund Fees There are many fees an investor will incur when investing in mutual funds.
One of the most important fees to focus on is the management expense ratio MER , which is charged by the management team each year based on the amount of assets in the fund. The higher the MER, the worse it is for the fund's investors.
It doesn't end there: In terms of the beginning investor, the mutual fund fees are actually an advantage relative to the commissions on stocks. The reason for this is that the fees are the same regardless of the amount you invest. The term for this is called dollar cost averaging DCA , and it can be a great way to start investing. Reduce risk with Diversification Diversification is considered to be the only free lunch in investing.
In a nutshell, by investing in a range of assets, you reduce the risk of one investment's performance severely hurting the return of your overall investment. You could think of it as financial jargon for "don't put all of your eggs in one basket". In terms of diversification, the greatest amount of difficulty in doing this will come from investments in stocks. This was illustrated in the commissions section of the article, where we discussed how the costs of investing in a large number of stocks can be detrimental to the portfolio.
This will increase your risk. This is where the major benefit of mutual funds comes into focus. Mutual funds tend to have a large number of stocks and other investments within the fund, which makes the fund more diversified than a single stock. A Small Step Toward a Large Future It is possible to invest if you are just starting out with a small amount of money. It's more complicated than just selecting the right investment a feat that is difficult enough in itself and you have to be aware of the restrictions that you face as a new investor.
You'll have to do your homework to find the minimum deposit requirements and then compare the commissions to other brokers. Chances are you won't be able to cost-effectively buy individual stocks and still be diversified with a small amount of money.
Given these restrictions, it's probably worth starting out on your investment journey with mutual funds. However, like all aspects of investing, it's up to you to do the research and figure out the strategy that suits you best.
Chad graduated from the University of Alberta Business School with a degree in finance. Join Today Already a member? Browse The Financial Glossary:More...