Investing in the stock market is one of the smartest steps you can take to improve your finances and build wealth over the long term. A diversified portfolio of well-researched investments can put your money to work for you, giving you the best chance of earning reasonable returns while minimizing your risks. But for many people, obstacles stand in the way of buying stocks.
In particular, many Americans likely aren't investing because they think they don't have enough money to do so. But if a lack of available cash is holding you back, your small pocketbook may not be the obstacle you think it is. There are now plenty of options to get started investing with very little money, although that doesn't necessarily mean everyone should put their spare dollars into the market.
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Not sure you have the money to begin investing? Here's what to know.
First things first: There are some circumstances where you don't have enough to start investing. In particular, you aren't ready if:
- You have high-interest debt: If you have credit cards or payday loans, the interest on them will likely dwarf any returns you could earn in the market. You should pay them off before investing, with one exception: contributing enough to get your full employer matching funds on your 401(k). Earning your match should typically be your second highest priority after making minimum debt payments; otherwise, you're passing up free money.
- You have no emergency fund: An emergency fund covers the unexpected expenses that are all but certain. Eventually, your emergency fund should be big enough to pay for three to six months of essential expenses. But you don't have to amass that much money before you begin investing. You could save up a small emergency fund of around $1,000 or $2,000 first, then split your spare cash between bulking up that fund and investing. Your small emergency fund should cover most expenses without you having to go into debt or sell stocks.
Once you repay your high-interest debt and save for emergencies, you're most likely ready to begin investing, after you've done your research to become an informed investor.
You can start with even a small amount of spare cash that you won't need over the next two to five years. You don't want to invest money you'll need before then, since you might be forced to sell at an inopportune time. But with a timeline of five years or longer, you increase the chances of earning positive returns by giving yourself time to wait out downturns.
Notice that I said you can invest even with a "small" amount of spare money. And this really can be as little as a few dollars thanks to the fact most brokers have eliminated commissions for trades, and an increasing number allow you to buy fractional shares (which are, as the name suggests, fractions of whole shares). With no commissions, you can buy just a couple of dollars worth of exchange-traded funds (ETFs) or stocks and start putting your money to work.
With $10 to spare, for example, you could buy a partial share of an ETF that tracks the S&P 500 or around 0.003 of a share of Amazon stock (or whatever stock you want). If your investment performs well, the returns you earn will be the same, percentage-wise, as investors with far deeper pockets earn.
As you get more spare money over time, you can keep investing and, by building a diversified portfolio, hopefully grow all those small contributions into a nest egg that enables you to do big things.
