Basic Investing Advice for the Small Investor
Time is an investor’s best friend and even a small investment of $100, $50 or even $25 a month can payoff through the magic of time and compounding interest. Although investing can be a very rewarding experience, many people, especially young adults, are reluctant to start an investment plan. Part of the problem is the common misconception that investing takes a lot of time and money and requires the person to sacrifice the “good things in life.” Spending less and saving more doesn’t mean you have to give up having fun altogether. By setting up a budget and controlling impulse buying, you can save enough to begin investing. The next step for the small investor is to learn about and understand the various investment opportunities.
Safe Investing for the Small Investor
Savings and Money Markets Accounts
Saving accounts have been considered safe and convenient investment options because they offer minimum risk because deposits are FDIC insured (currently up to $250,000). A money market account is like a savings account except that it offers a higher interest rate and has more restrictions on accessing the funds in the account. Some banks make it easy to save by allowing you to round up your debit card purchases to the next dollar and then transfer the difference to your savings account. Other banks may offer a free savings account when you open a checking account. Exclusively online banks such as Ally Bank can offer more competitive rates with minimum deposit requirements (currently $0 to open an account, no minimum balance, and a six transactions limit to avoid fees). However, to get the premium interest rates, you may have to show an acceptable credit history.
Certificate of Deposits (CDs)
Certificate of Deposits (CDs) are another type of safe investment traditionally offered by banks, credit unions, and other financial institutions, which pay a higher interest rate than savings or money market accounts. You earn a higher interest because you are committing your funds for a set period of time and may be penalized if you withdraw the funds early. There are many different types of CDs to choose from depending upon your investment goals. Online banks such as Discover Bank have higher competitive rates (currently advertising 1.50% for a one year CD). When investing in CDs be sure to ladder the maturity dates so that the impact of changing interest rates will be spread out.
United States Government Bonds
Buying United States government bonds is secure and simple. Basically, all you need to buy a typical savings bond, known as an EE bond, is a checking account, an online account with Treasury Direct, and $25 to get you started. One of the most popular government bonds is the Treasury Inflation Protection Securities (TIPS), which adjusts for inflation and be purchased in $100 increments.
Continue to page 2 to see how small investors can invest in stocks, ETFs and mutual funds.
Higher Return Investments Stocks, ETFs, Mutual Funds
Investment in higher return assets, including stocks, exchange traded funds (ETFs), and mutual funds, is another option for small investors who may have more funds to commit and a higher risk appetite. However even with a few dollars, you can buy stocks and ETFs and begin making regular investments. Sharebuilder is a great choice for small investors because its costs $ 0 to open an account and only $4 to make a scheduled stock purchase, and you can invest any amount of money. To buy into a mutual fund you will need to make an initial investment of at least $100. But after your initial purchase, most mutual funds allow you to make smaller contributions so you can stay within your minimum investment level. For instance, Schwab offers small investors entry into index and bond funds, including the benchmark S&P index fund, which has an initial investment requirement of $100 with subsequent contributions as low as $1.
Investment Goals and Opening an Account Online
Once you understand the various investment opportunities, the best investing advice for the small investor is to evaluate your investment goals. The rule of thumb is the shorter the timeframe until you need your principal back, the more your portfolio should be weighed toward conservative investments.
Investing for the small investor doesn’t have to take a lot of time. Purchasing a CD or opening a savings, money market, or online broker account will take only about 10-15 minutes. You will need to have on hand your social security, tax identification or employer identification number, a government issued identification number (driver’s license, state ID, or military ID) and the bank account and routing numbers of the bank in which funds are being transferred to open the new account. After taking the plunge into investing and visually seeing your money grow over time, you should find the motivation to become a lifetime investor.
Money 12 by ArtFavor at Open Clip Art Library.