Fractional shares, index funds, dividend stocks: How to invest if you don't have a lot of money
Not everyone can afford to part with hundreds or thousands of dollars a month to fund a brokerage account or retirement plan. Many people live on a tight budget with little wiggle room outside of their essential monthly expenses. If you're dealing with limited investment funds, worry not – you can still do very well for yourself in the stock market. Here are a few things you may want to do to put your money to good use.
1. Look at fractional shares
It used to be the case that if a specific company was out of reach because its share price was too high, you'd have to find a different investment. Nowadays, many brokerages allow you to buy fractional shares, which open the door to more opportunity.
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As the name implies, fractional shares let you buy a piece of a share of stock. As of this writing, Amazon (NASDAQ: AMZN) is trading at about $3,182 a share. If you only have $1,000 to invest, you can't buy a whole share of Amazon. However, you can buy a portion of a share and then capitalize on it the same way you would if you owned a whole share.
2. Load up on index funds
When funds are limited, it's important to avoid hefty investment fees that eat away at your returns. That's why index funds may be a good solution to explore, especially for your 401(k), which won't let you invest in individual stocks.
Index funds are passively managed funds that aim to track the performance of their associated market indexes. An S&P 500index fund, for example, will aim to match the performance of that same index, which means that when the broad market does well, so will you. The great thing about index funds is that their fees, which are known as expense ratios, are just a fraction of what you'll generally pay to invest in actively managed mutual funds, but you won't necessarily lose out on performance, because index funds generally outperform actively managed funds.
Another great thing about index funds is that they offer instant diversification. It's hard to assemble a wide range of investments on a budget, but index funds make that a lot easier.
3. Favor dividend stocks
The great thing about dividend stocks is that they can generate ongoing revenue for your portfolio even when the broader market underperforms. A company with a solid history of paying dividend stocks is likely to continue doing so even when its stock price drops or market conditions decline on the whole. Those dividends can then be used for whatever purpose you want – extra income, or additional funds you can reinvest.
It's a common misconception that you need to have a lot of money to do well in the stock market. If you can't afford to max out a 401(k) or pump thousands of dollars each year into a brokerage account, invest what you can. The sooner you get started, the sooner you can put your money to work, and that's a great way to turn a modest amount of cash into quite a substantial sum through the years.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Maurie Backman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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