How to Start Investing in the Stock Market with Just $50
Saving money on start investing stock market does not have to be complicated. We rounded up the essentials so you can spend less and skip the guesswork.
Key Takeaways
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- Most people wait to start investing until they have a significant amount of money saved up.
Most people wait to start investing until they have a significant amount of money saved up. This made sense a few years ago for two reasons:
- Mutual fund companies had high account minimums (some were as high as $3,000).
- Brokerage firms charged high fees, which ate up the returns of small accounts.
But now there are high-quality, zero-fee investment providers that let you get started for $50 (or even less, in some cases).
If you’re wondering how to invest $50 in the stock market (or whatever little money you have, for that matter), this article can help.
Table of Contents
ToggleShould You Start Investing?
Before you start investing in the stock market, you want to make sure that doing so makes financial sense.
The number one reason why you shouldn’t start investing is high-interest debt. If you have high-interest debt like credit card balances, you should hold off on buying stocks.
That’s because the stock market has returned an average of about 7% per year after inflation. So if you have debt at a higher interest rate than 7%, getting out of debt as fast as possible is your best investment. It’s also a guaranteed rate of return, which is something the stock market can’t provide.
Does Investing With Little Money Matter?
Next is the fact that a little money plus a lot of time results in a lot of money.
To illustrate this point, here’s what $50 a month at a 7% returns compounds to:
YearsAmount10$8,38820$24,79130$57,05740$120,53050$245,390When you start early, even as a teenager, you have the tremendous advantage of compound interest on your side. This is how you can build generational wealth, even if you don’t make a lot of income.
What Type of Investment Account Should You Open?
There are two primary types of investment accounts.
- Taxable accounts.
- Retirement accounts.
In a taxable account, any income earned is, as the name suggests, subject to taxes. That includes dividends and gains if you were to sell. Examples of taxable accounts include standard brokerage accounts, like the ones you’d get by signing up with Robinhood.
With retirement accounts, such as IRAs and 401(k)s, taxes may be deferred (so you owe less today) or paid upfront so your investments can be sold tax-free during retirement.
The difference between these account types is huge!
Let’s say you invested $50 per month for 40 years (between the ages of 25 and 65). If you placed those funds in a taxable account, you might end up with a figure around $50,000. If you placed them in a traditional retirement account, that figure might be closer to $75,000.
Your actual returns would vary depending on numerous factors, including your investment choices and the overall economic environment. However, these figures (as illustrated in the chart below) show the impact of investment fees and taxes on the value of your portfolio over time.
Taxes eat away at your gains, so it’s key that you pick the right investment account.
If your employer offers a 401(k) with an employer match, this is a excellent place to start. You won’t come close to matching the returns your employer’s 401(k) match will provide.
If you don’t have access to a 401(k) with an employer match, I’d recommend a Roth IRA, which allows you to contribute after-tax money today and then withdraw that money tax-free starting at the age of 59.5 years.
Here’s a guide that explains more about the differences between traditional and Roth IRAs.
Keep in mind that 401(k)s have their own fees, which can also eat away at your potential returns. We created a calculator help you determine your 401(k) account expense ratio quickly.
Different Ways to Invest in Stocks
You might be thinking that you want to take your $50 and invest it in a company like Amazon, Facebook or Tesla. But if maximizing your returns is your goal (which it should be), that may not be in your best interest.
Few investors, including professionals, are able to pick individual stocks and beat the market. They might get lucky once or twice, but study after study has shown that few succeed in the long run.
Of course, it’s hard not to try and pick the next big stock market winner. After all, this is what gets a lot of people interested in investing. I’m in this camp myself.
If that’s the case for you, I suggest limiting the amount you invest in individual stocks to no more than 10% of your total investments. You can check out our beginner’s guide to investing in stocks to learn more about individual stock investing, including where it fits within your overall financial plan.
The approach that research shows has enabled individual inventors to outperform market averages , and even most investment professionals , is low-cost index fund investing.
An index fund is a mutual fund that holds a collection of stocks. For example, an S&P 500 index fund holds stock in all the companies that make up the S&P 500 (which includes the 500 largest companies in the U.S.).
There are a number of advantages to investing in index funds, especially for those wondering how to invest $50 in the stock market:
- Low fees. Index funds charge very low fees.
- Tax efficient. Because they don’t trade a lot of stocks, index funds incur minimal taxes.
- Low maintenance. You get a totally hands-off investment.
Related reading: How to invest for retirement In your 20s, 30s and 40s.
Where to Invest as Little as $50
The one downside to getting started with as little as $50 is that you’re limited to certain investment providers.
Numerous investment firms still have minimum deposits that start at $1,000.
Also, you need a brokerage that allows you to invest in fractional shares. Numerous of today’s most popular stocks go for hundreds or thousands of dollars per share, so going with a brokerage that allows you to purchase fractional shares gives you significantly more options.
BrokerageBrokeragePublicRobinhoodMoomooAccount TypesAccount Types Taxable accounts only. Taxable accounts only. TaxablFinal Thoughts
The bottom line: a little research on start investing stock market goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.
Originally published at thewaystowealth.com.
R.J. Weiss
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