Invest a Small Amount of Money Online

People who are relatively inexperienced with the financial world may think of online investing as exclusively for big-time traders and representatives of financial institutions who trade stocks and other equities professionally. However, that is not the case. A beginning investors who can devote only a small amount of money to the task can put that money into an online brokerage account and may make it grow through a series of prudent trades. For those who want to get started, some solid steps toward developing an investment plan can help to limit risks and maximize gains.

Steps

Finding an Online Broker

1. Select a broker with low account minimums. If your goal is invest small amounts of money online, your number one objective should be to Choose an Online Broker with very low to no minimum required investment. Typically, brokers do require at least $1,000 minimum investment, but there are many that require less.
   • Currently, online brokers that have no minimum initial investment include TD Ameritrade, Capital One Investing, First Trade, TradeKing, and OptionsHouse.
   • "Small Amounts of Money" varies between investors. For investors with slightly higher minimums, E*Trade requires a $500 minimum, and Charles Schwab requires $1,000.
   • Note that investing less than $500 is often not recommended, since there is typically a fee per trade of over $5, which means a $500 investment essentially starts off with a 1% loss due to the fee.
   • You can avoid brokerage fees — and sometimes a broker entirely — by enrolling in a dividend reinvestment plan (DRIP) directly thorough an underlying company. Instead of receiving your dividends in the form of cash, the dividends will be automatically reinvested in the company for price appreciation and compounding. Some DRIPs are free, while others require a small fee.
2. Examine fees carefully. Unfortunately, investing online is not free, and brokers do charge a variety of fees. These fees are typically charged per trade (meaning you are charged once when you buy something, and once when you sell). These are known as commissions
   • Before opening an account, it is important to look at the fees charged on stocks, mutual funds, and ETFs (Exchange Traded Funds). These are the three main types of investments that are appropriate for those investing small sums.
   • Typically, commissions on stock transactions for small trades range from $4.95 to $10.00, whereas mutual fund commissions range from $15 to $80. ETFs are often offered commission-free by brokers. Since mutual funds and ETFs are important types of investments for those investing small sums of money, you should select a broker with low mutual fund fees, and commission-free ETF trading.
   • Websites like Stockbrokers.com can be a valuable resource for comparing fees between brokers. You can use this website to look at all the brokers mentioned above to choose the one with the lowest cost.
3. Select an account type to open. Once you select a broker that has both low minimums (allowing you to invest small sums), and low fees for stocks, bonds, and mutual funds, you will need to choose an account type to open. While there are many types, the main ones to know are Individual, Traditional IRA, and Roth IRA.
   • Individual account. These are offered by most brokers, and they are standard accounts with no special tax privileges. This means any profits you make while investing and any income you earn from your investments will be taxed at appropriate rates.
   • Select an IRA. A traditional IRA is a type of retirement savings account. Money deposited into a traditional IRA grows tax-deferred (meaning you don't pay any tax until you withdraw it), at which point it is taxed at normal income. With a Traditional IRA, you cannot withdraw money until you are at least 59.5 years of age, or you will receive a penalty. Contributions to a traditional IRA are usually tax-deductible.
     • Contributions to IRAs, whether traditional or Roth, are limited by income earned.
   • Choose a Roth IRA. A Roth IRA is also a type of retirement savings account. Like a Traditional IRA, earnings grow tax-free, except contributions are not tax deductible. The main benefit is that when you withdraw the money, you do not pay any taxes on your contributions (since they were paid on your income before you contributed). You can also withdraw your initial contributions any time with no penalty or taxes.
   • Which to choose? The answer depends entirely on when you need the money and your goals. If you are starting a retirement account and do not plan on using the money until you are 59.5, the Traditional IRA may be appropriate. If you need the money sooner, a Roth IRA or individual account are likely better options.

Choosing Investments

1. Understand asset classes. Once an account is opened, the next step it to choose what to buy. You will first need to understand the different types of asset classes. An asset class is simply a group of investments that have similar characteristics. The main asset classes are equities (like stocks), bonds, and cash.
   • The key to successful investing is building a portfolio that has a good balance of each these asset classes. This helps to manage your risk (or prevent losses), while making money.
2. Learn about equities. Equities are the most popular asset class, and this includes stocks, but can also include mutual funds and ETFs. An equity is simply ownership in a business. When you purchase a stock, you are therefore purchasing a piece of a company, and in doing so you have the opportunity to grow your investment as the business grows.
   • Stocks are the riskiest type of asset class for the most part. This is due to the fact that they are extremely volatile, and it is not uncommon for some, and occasionally (in the case of market crashes) most stocks to lose up to 50% or more of their value. Purchasing individual stocks should only occur after significant research and is typically not recommended for brand new investors.
3. Consider Understand Mutual Funds or ETFs instead of individual stocks. If you are new to investing, consider mutual funds or ETFs as a means of owning equities. Mutual Funds and ETFs are baskets of stocks or other investments, and when you purchase a share of a mutual fund or ETF, you are effectively owning a piece of dozens (or sometimes hundreds) of different stocks.
   • What is the difference between a mutual fund and an ETF? While they are both baskets of stocks, and the basket is managed by a professional investor, there are a few differences. The main difference is that ETFs are actively traded just like stocks, and their prices fluctuate throughout the day. Mutual Funds, on the other hand, have prices that are set at the end of the day.
   • Mutual funds are actively managed to achieve specific investment goals while ETFs are managed to replicate the price movement of a specific stock index. Managers of mutual funds typically collect management fees significantly higher than managers of an ETF.
   • For investors looking to invest small sums, ETFs are largely a better option. Firstly, mutual funds typically have minimum requirements (often $1,000). Secondly, mutual funds are often higher cost. Not only is the commission to purchase mutual funds much higher (many ETFs have no commission), but the annual fees for using mutual funds are also typically higher.
   • One of the more popular ETF investing strategies is to buy Index ETFs. These are ETFs that follow a stock exchange, like the S & P 500. Common Index ETFs include the SPDR S & P 500 ETF, and the iShares Russell 2000 Index ETF. When the stock market does well, an Index ETF performs exactly in line with market, and with the S & P 500 producing average returns of 11% since 1954, this has been a profitable strategy
4. Understand bonds. Bonds are a less risky asset class than stocks. A bond simply represents debt, and when you purchase a bond, you are effectively lending money to the bond issuer and receiving a bond certificate in return. You can purchase corporate bonds, government bonds, or municipal bonds.
   • Bonds pay interest, known as a coupon, and the coupon is a percentage of the bond's total value. Bonds also have a term, known as maturity date, at which point you receive your initial investment back.
   • For example, you may purchase a government bond for $1,000, with a coupon of 2%, and a maturity date five years from now. You are therefore entitled to receive 2% of $1,000 (or $20) a year for the next five years, plus the $1,000 on the maturity date.
   • The market prices of bonds move negatively with the direction of interest rates. When interest rates rise, prices of outstanding bonds generally fall; when interest rates fall, bond market prices generally rise.
   • Purchasing bonds can be complex and expensive. If you want to purchase bonds, the simplest way is to purchase a bond ETF. Just like stock ETFs, bond ETFs are simply a collection of bonds, and can be purchased easily, and at a low fee.
   • A popular bond ETF is the Total Bond Market ETF, and this ETF holds a variety of different government and corporate bonds. Bonds represent a safer alternative to stocks.
5. Select an asset allocation. If you are investing small sums of money, it is wise to diversify and not invest 100% of your amount in only equities or only bonds. The traditional combination is to purchase 60% equities, and 40% bonds. This ensures that 40% of your money is not exposed to the volatile stock market, while the majority benefits from stock markets that have traditionally risen over time.
   • For example, if you have $800 to invest, you may opt to spend $480 on an Index ETF, and $320 on a bond ETF.
   • Your asset allocation, however, depends on your level of risk, and your goals. If you want to be very conservative, and need the money in a short period, you may opt for a 100% bond portfolio. If you have a longer-time horizon, and can afford to lose money over the short-term, you may choose a heavier percentage towards stocks.
   • Never invest money that you need in stocks. Money invested in stocks should represent extra money that you do not need for a long time period.
   • Defer investment in the stock market until you have an adequate savings account for emergencies.

Making Your Purchase

1. Buy your investment. Once your account is open, and your investments are selected, it is time to make a purchase. This typically varies between brokerages, but the main principles remain the same.
   • You can begin by opening a new order. At this point you will need to enter the symbol for the investment you want. If you want to buy the SPDR S & P 500 Index ETF, for example, the symbol is SPY. You can locate the symbol by Googling the name of the ETF.
   • After you enter the symbol, you will need to enter the amount of shares or units you would like to buy. If the share price is $10 for example, and you have $100 to invest, you can afford to purchase 10 shares or units.
   • At this point, simply press the buy button, and you will now own the investment you purchased.
2. Decide on an order type. There are two basic types of orders that can be used to purchase and sell assets in financial markets. The first is a market order, which specifies that an asset be purchased or sold as soon as possible at the market price; however, time delays mean that the purchase or sale price of the asset when the order is filled might be different from the price when the order is placed. The solution to the this is the other type of order, a limit order. This order is one to sell at a price at or above a chosen limit price or to buy at a price at or below the limit price; however, a limit order will not be filled if the chosen limit price is not reached.
3. Hold your investment over time. Once you make your purchase, the wisest course of action is simply to do nothing. You can expect your investment to fluctuate in value over time, and it is important not to sell simply because an investment moves downward. Remember, just as you did not predict the downward movement, you will also not be able to predict a rebound.
4. Re-balance your portfolio. If you chose your asset allocation to be 60% stocks, and 40% bonds, you will occasionally need to "re-balance" to ensure your percentages remain the same. This is typically done annually.
   • For example, if your stocks do well and at the end of the year represent 80% of your portfolio, leaving only 20% bonds, you would need to sell some to bring allocation back down to 60% stocks and 40% bonds.
   • If you choose not to re-balance, keep in mind that you are taking on additional risk by having a portfolio dominated by stocks.

Tips

• Take a page from the playbook of the United States Securities and Exchange Commission. The SEC offers beginning investors helpful tips on online trading, including information about limit orders and stop-loss orders that can help amateurs control prices for their buying and selling. This can protect new investors from some of the riskier aspects of the stock market.

Sources and Citations

See also

• Invest in Mutual Funds
• Buy Exchange Traded Funds
• Hedge in Investments
• Invest when Retired
• Find Help With Investing
• Make Money in Commodities
• Calculate Annuity Payments
• Calculate Annual Salary
• Invest
• Get Rich

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