Invest Like a Poor: How to Invest $50. Here's What I Recommend.
It is true that $50 is not going to turn you into the next Warren Buffett, but it can help you make a triumphant entry into the world of investing. You can invest $50 in either stocks, index funds, mutual fund, among other options. Alternatively, you can hire a robo-advisor to do the job for you. Let's weigh a few options. Which one makes the most financial sense for a rookie investor?
In simple terms, stocks allow you to own a piece of a company. Learn more about stocks. They offer investors arguably the highest potential for capital appreciation. But given their relatively high volatility, you can lose a considerable amount of money, if the company stock decreases in value. In addition, investing in stocks comes with many intricacies that the newcomer investor may find particularly challenging. First, stock picking is an art; an investor needs to do considerable research to pick "winning" stocks. Second, there are fees associated with trading stocks, including but not limited to brokerage fees. Such fees can diminish your returns over time. Another drawback is the inability to buy fractional shares, an option afforded by mutual funds.
2. Mutual funds
Mutual funds offer numerous benefits. They are a type of investment that pools money from many different investors, in order purchase other investments, such as stocks, bonds, etc. They offer investors an extraordinary opportunity to build wealth in the long haul. Compared to stocks, they are less risky, and allow investors the opportunity to buy fractional shares. For example, if the net asset value, NAV, of a mutual fund is $9.50, you would be able to purchase 5.263 shares with $50 (50/9.50). Although many brokerage firms do not charge fees when you buy or sell mutual funds, there are other management fees to be mindful of. For instance, the expense ratio, which tells you how much the fund charges annually to operate it, is one of such expenses. Passively-managed mutual funds, like index funds, incur lower fees than actively-managed ones.
3. Index funds
Index funds are special types of mutual funds. They track the returns of a broader market index, such as the S&P 500, Russell 2000 Index, NASDAQ Composite Index, etc. The benefits of index funds are many. You can use them to help create a more balanced portfolio with a single fund. They allow you to buy fractional shares, and carry very low low expenses ratios. They are so awesome that Warren Buffet has endorsed them! Here's our final verdict.
The bottom line
You don't need to be wealthy to start investing. The novice investor may find stock investments challenging, due to the reasons outlined above. Because index funds track the returns of a broader market index and carry very low expense ratios, the inexperienced investor may want to invest his/her first $50 in a low-cost S&P 500 index fund to become a Warren Buffett winner. Suitable S&P 500 index funds include the Fidelity® 500 Index Fund (FXAIX), the Vanguard 500 Index Fund (VFINX), the iShares Core S&P 500 ETF, or the Vanguard S&P 500 ETF (VOO). For the investor who does not want a S&P 500 index fund, a total market index fund could get the job done as well.
Like this article? Please share and leave us your feedback in the comment section. Here are a few other articles you may find useful: Stocks vs. index funds vs. ETFs: differences and similarities | How to invest your tax refund | How to invest $100 | How investors make money in the stock market | Cash is trash, not king. Invest it | A simple 7-fund investment portfolio to help maximize your returns.