If you think you need lots of money to invest, think again. Investment apps, which typically offer commission-free trades and have little or no minimum investment, have ushered in a new era that makes investing small amounts of cash viable.
The Penny Hoarder recently surveyed nearly 2,000 people in the U.S. who regularly use investment apps and found that most users are investing relatively small amounts. Nearly 70% have bought stocks for $5 or less. People ages 35-44 were the most likely age group to buy cheap stocks, with nearly 75% reporting they had bought stocks for $5 or less.
How Can You Invest With Just $5?
Investors who want to invest a small amount of money have more options than ever. If you’re seeking to invest a few bucks using an app, you could:
Buy Penny Stocks
Traditionally, a stock that traded for less than $5 was known as a penny stock. Many trade for $1 or less.
Penny stocks look appealing because they trade at rock-bottom prices, but they’re incredibly risky. The companies behind them are often unproven or financially troubled. While investors are often drawn by the potential to make big gains off a small investment, you’re a lot more likely to lose all your money when you invest in penny stocks.
Buy Fractional Shares
In the past couple of years, fractional shares have become a game-changer for people without much money to invest. Fractional shares let you invest small amounts in virtually any stock you want. As the name implies, you get a corresponding fraction of a share.
For example, let’s say you want to invest in Amazon. As of this writing, Amazon shares were trading for just above $3,000. So if one share of Amazon costs $3,000 but you only have $5 to invest, you can invest just $5. You’d get 1/600th of a share.
Compared to penny stocks, fractional shares are a much safer option for investors who want to choose their own stocks and exchange-traded funds (ETFs).
Use a Micro-Investing App
A micro-investing app is a good option for those who want to invest small amounts but don’t want to DIY their portfolios. Many let you get started with as little as $5. You’ll automatically invest small amounts on a regular basis, often in ETFs and mutual funds chosen by a robo-advisor. Some micro-investing apps let you round up your purchases to the nearest dollar and automatically invest the change.
Is Investing Just $5 Worth It?
Obviously if you’re saving for retirement, you’ll need to invest a lot more than $5 on a regular basis. A good rule of thumb is to save around 15% of your pre-tax income in a retirement account, like a 401(k) or individual retirement account (IRA).
But if you’re already saving in a retirement account, investing extra using an app is a good choice. (Note: Some investment apps allow you to open IRAs and retirement accounts for self-employed people.)
Suppose that in addition to saving for retirement, you invested an extra $5 a week using an app. Let’s assume you did so consistently over a 30-year period, earning annual returns of 8%. You’d have more than $32,000 extra in your nest egg after four decades. Not too shabby when you consider that you would have invested less than $8,000.
6 Tips for Investing Small Amounts of Money
If you’re ready to start investing but don’t have much cash to spare, follow these tips.
1. Start With Your 401(k) Match
If your employer matches your contributions for a 401(k) or another type of retirement account, take advantage of that free money first. Once you’ve squeezed every dime from your company match, you can put whatever extra money you have to work using an investment app.
2. Invest More With Every Raise
Don’t shy away from investing if you can only afford to invest a small amount. But make a goal of investing more money any time your income increases. For example, you could budget 25% or 30% of every raise toward reaching your investment goals.
3. Watch Out for Fees
One of the big pitfalls to watch out for when you’re investing small amounts is the fees. They may look small, but they can make a serious dent in your returns. Let’s say you invest $50 in a lump sum and leave your money put for a year. If your investment app charges $1 a month, that amounts to a 24% investment fee. Aim to keep your investment costs at 1% or less of your total investment.
4. Choose Fractional Shares Over Penny Stocks
You’re much more likely to profit if you buy fractional shares in established companies instead of buying penny stocks in companies that may very well prove worthless. If you’re not sure where to start, a good first investment is an ETF that tracks the S&P 500 index, which is a collection of 500 stocks that collectively represent 80% of the U.S. stock market.
5. Invest Consistently
No matter how big or small your investment budget is, dollar-cost averaging tends to be a winning strategy for the long term. What that means is that you invest a fixed amount on a regular schedule regardless of what’s happening in the stock market. If you automatically invest $5 a week using an app, you’re practicing dollar-cost averaging.
Doing so helps you avoid making emotional decisions, like selling in a panic when your investments are down. If the stock market is up, obviously you’ll pay more for your investments. But investing on a consistent schedule ensures that you invest when the market is down, as well. People who practice dollar-cost averaging tend to lower their investment costs over time.
6. Don’t Invest Your Emergency Fund
Investing is pretty much the only way most people will build enough wealth to retire someday. But before you start investing, aim for a three-month emergency fund. Having money saved for an unexpected expense or loss of income will protect your future investments. If you lose your job right after the stock market crashes, you don’t want to sell your investments at a loss just to cover your expenses.
Once you’ve saved for a rainy day, don’t delay investing. Time is your friend. Investment apps make it easier than ever to get started, even if you don’t have deep pockets.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.
About the Survey
The Penny Hoarder conducted the random national survey in partnership with Pollfish from December 15-18, 2021. Pollfish screened respondents by asking if they had used at least one investment app regularly within the past year: 3,581 people responded to the screening question, with 2,000 people who used at least one investment app regularly advancing to the survey’s 20 questions. The Penny Hoarder analyzed the data and removed 82 responses that were not valid, bringing the response count to 1,918. Responses were weighted for age and gender so that each response is representative of the U.S. population. The overall survey’s margin of error is +-2 percentage points at a 95% confidence interval.