The average investor is at a distinct disadvantage in today’s markets. Large institutional investors, hedge funds, and other large investment houses all have tools available to them which are not available to the average investor. These tools allow them to see what is going on in worldwide markets as well as trade out of the spotlight of the public market. An individual investor can make money mainly by understanding this system, using their wits and learning about available investment options thatmay be new to them.
One example of investment vehicles that is new to many individual investors is exchange traded funds. Exchange traded funds, or ETFs, are buckets of investments pooled together and then sold as though they are individual stock. Technically, they are funds made up of combinations of investments, or they track individual investment vehicles, such as commodity futures. It’s a way for an individual investor to get into certain investment vehicles that might not be available to them otherwise. As an example, many 401K accounts do not offer ETFs as an investment option. Usually, a 401K retirement account is run by a fund company and therefore mutual funds are the extent of the investments available for your retirement funding. Today investing in mutual funds may not always be a good idea. They can have high fees, inflexible investment requirements and other issues that can cause you to lose money when what you’re trying to do is build your retirement account. With exchange traded funds on the other hand, you have options available to you to invest in individual shares of vehicles that allow you to diversify your funds. You can get in and out of an ETF immediately, not at the end of the trading day as with the mutual funds. In addition the fees are generally much lower for ETFs than for mutual funds.
So how can an individual investor get involved in investing with ETFs? The easiest way is by opening a self directed IRA account, or a self directed 401K rollover. These accounts allow you to choose your own investments, and not rely on a pool of investments that are pre-chosen for you by your fund manager. In addition you can pick and choose investments based on your feeling about the market, and allows you to be more self reliant in your investment choices and decisions. As we saw in the last economic down turn, the fact that an individual is a professional advisor by no means guaranteed anyone profits in their portfolios. To the contrary, professional advisors did as poorly in the economic downturn as anyone else. It was only by learning about the markets and investing on your own behalf that your discount brokerage account will be managed with your best interest at hear and not commissions and fees for your broker.
We all hear about how important it is to invest, and this includes individuals and families who don’t have a lot of extra cash on hand, but understand the importance of why you should “pay yourself first” by putting money aside. It’s important to know that even if you only have $25 to invest, or as little as $5, you can begin to secure your financial future by saving, investing, and laying the foundation for future wealth.
When investment banks throw around numbers in the millions, billions and trillions, it can make a small investor feel like there’s no point to putting aside just a little extra money each paycheck. It seems futile when the money you want to invest can barely buy one share of stock, with the commissions being extra! With a small amount like $5 or $10 to invest, it’s hard to see how that will add up to any real money in the near future. Yet even if you can’t buy stocks, that’s really not the right way to look at the matter. Instead, it’s the simple act of making sure that at least some money from each paycheck gets put aside for yourself, instead of given to a retailer trying to separate you from your earnings. When you begin the habit of putting something into your savings or investment account each month, no matter how little it is you will begin to see the balance grow.
Open a self directed IRA or a 401k rollover account with a top rated discount broker
It’s true that the interest rates today are truly pitiful, under 1%, which does not give anyone an incentive to set money aside in a savings account. But instead consider that the purpose of saving is to begin to make the habit of saving important in your life.
When the interest rates on savings accounts are virtually non-existent, so low they aren’t worth even mentioning, it can send the small investor looking for other ideas, other ways to make even that small amount of money work for them. And believe it or not, there are plenty of other options for investing with small amounts of money. But for now, keep that savings account open, or start one like and online savings account, where you can stash money any time you have it. Later as your balance builds, you will move it into other investment vehicles that will earn you more. At least until interest rates go higher, use a savings account as a place to make it easy to save up extra cash.
The first rule of thumb is that you should strive to save ten percent of your income as savings. Start a rainy day fund, an emergency fund, or whatever you want to call it, but saving like this would be used mainly to make sure you are able to pay for an emergency when it comes along, like a car repair, hospital bill or job loss. Ten percent might sound like a lot, and even be beyond what you can afford. But think of it as a goal, and save whatever you can. Putting $10 aside twice a month when you get paid is just fine.
So where do you invest $5 or $10, or other small amounts? The first place to start, is that savings account and an emergency fund. Work toward having a balance of $500 or $1000 in that account before you do anything else. Along with your savings form your paycheck, you can also have a garage sale or pick up a second part time job to fund that balance. Try selling items on eBay or Craigslist to get fast cash.
Once you have some emergency cash set aside, the best thing you can do is pay down high interest rate credit card balances. It just does not make sense to pay 18% to 29% interest on a credit card balance every month, as you try to find out where to earn 2-3% on a savings account! Your money is not working for you that way. By paying off your high-interest card, that’s like earning 18% on your “investment” right there! There is absolutely nowhere else you can go to invest $25 and earn an interest rate of 18-29%! That is just a fact. So any small amount you save up, add it to your high interest rate loans. Simply make the payment for five or ten dollars more than the minimum. Ideally, you will want to make the largest payment you can afford, to pay off balances more quickly.
If you don’t have much in the way of expensive credit card debt, then you have some interesting investing options. First, you can always invest in good old United States savings bonds. You can buy EE bonds, which most people are familiar with, which you buy for half the face value, it pays a fixed rate of interest, and the bond matures in twenty years, reaching the full face value. You can also buy these at face value online, with TreasuryDirect.gov. This is convenient because you can open an account and have money transferred from your savings account right to your Treasury investing account. There is also the newer I-bond, which pays a variable interest rate based on the rate of inflation. It’s a little different in that you pay the face value, a minimum of $25, and the interest will to accrue until you cash it in, there is no maturity date after which no additional interest accrues. There is a penalty however for cashing in either of these types of bonds during the first five years you own them.
Beyond savings bonds, what other options do you have? You can buy certificates of deposit (CDs) which give you a slightly higher rate of interest above that of a savings account – but not by much. today, many online savings accounts also offer purchase of CDs, for example ING Direct. You can buy a CD with as little as $100. This means you can’t really get at the money to spend it, which might be a good idea for some folks! While the interest rates aren’t great right now, at least you will have a way to earn and save until you decide on other vehicles for investment.
For another idea, you actually can buy stocks through some accounts with small amounts. Today there are accounts that let you invest in stocks with very little money. Sharebuilder is a service run by ING Bank that allows you to purchase stocks, with a $4 commission. The beauty of this however is that you can buy what’s known as “fractional” shares. That means you can buy a portion of a share, where most brokers would required you to buy at least one share. For example, if shares of Apple stock are $250, but you only have $25 to invest, you can purchase just $25 worth from Sharebuilder. Your purchases are scheduled throughout the month according to their buying schedule, so you can’t buy immediately, but you have the opportunity to participate in buying stocks, ETFs and mutual funds through this account. While we wouldn’t recommend that you pay $4 commission for a $25 investment – a 20% fee – at least you have the option to do so. You can also deposit your money into your Sharebuilder account, and wait until you build up a certain balance before buying. you can invest each paycheck as well. Along with regular investment accounts, they also offer IRA retirement accounts, custodial accounts for minors, and even 401(K) account for business owners. It’s a great way to invest your money.
With all of the above ideas, you now have no excuse not to get started saving money, even if you only have $5 to invest. There are many places where you can invest with small amounts. Now you know where to invest $5, where to invest $25, or even where to invest $500 or more. Get started and pay yourself first today.
