Investing with a Small Budget

by Sean Bryant on November 26, 2013

Investing on a small budgetInvesting with limited money can pose financial and emotional challenges. A small budget may limit investment choices, which can frustrate eager investors hearing of high returns by hedge funds or trading strategies geared to high net worth clients.

Those without a company 401k may feel particularly short of choices.

Thankfully, small investors have an array of options across various asset classes. These include traditional and non-traditional options that may be suitable to an investor’s unique situation.

Low minimum investments for small budgets include:

Exchange Traded Mutual Funds (ETFs)

ETFs are mutual funds that trade on stock exchanges. This means a set amount of shares is available to the general public, unlike open ended mutual funds that continually issue new shares.

An ETF typically has lower expenses than an open ended fund, which allows investors to keep more of their returns.

Share prices of ETFs will vary throughout each trading day and are determined by investor demand. ETF investment strategies include diversified and focused portfolios in domestic or foreign securities.

Small investors can buy shares of an ETF through a discount broker. While this entails paying a commission, it is a time and cost efficient means to purchase a professionally managed portfolio with a small budget.

Direct Purchase Plans (DPP)

A direct purchase plan allows investors to buy individual shares directly from companies without broker commissions or account minimums.

This low cost process allows small investors to create a diversified portfolio of stocks.

DPPs are typically offered by brand name companies with strong market positions. Many of these companies undergo stock splits to make shares more affordable to more investors.

Regulations prevent companies from advertising direct purchase plans, so investors will need to research available choices.

Micro Lending

Venture capitalists such as Elliott Broidy have brought attention to the investment potential of non-bank financing. Micro lending, also known as peer to peer lending, offers venture capital opportunities to small investors.

This concept was popularized by the success of small loans to villagers in developing countries. Micro loans have been credited with reducing poverty in many of these nations by enabling locals to start businesses.

Various crowd funding websites now also feature individuals or businesses seeking financing in the United States. The goals range from starting a business to social causes. A screening process by the sites should determine the legitimacy of micro loan applicants.

Investments are pooled and returns are determined through specified terms offered by the applicant.

Peer lending is very speculative and should be evaluated carefully.

The Importance of Getting Started

What defines investment success can vary based on individual goals. While budgets, risk tolerance and time horizons are unique; a common denominator is the importance of beginning to invest.

The power of compounding rewards smaller investors who begin investing on a limited budget rather than waiting.

Investors with high ambition but small budgets can now select from multiple choices to build their financial future.

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Sean Bryant

Sean Bryant created in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • Quite right! Until recently most investing options were for people who have managed to ammas substantial capital. I fully agree with the appropriatness of the three option you offer but would like to add that lately there have been other apportunities, mainly internet based. In the UK there is a platform called Nutmeg where one can invest relatively small amounts (about $1,500) in a basket investment; apart from that a crowd funding investment opportunity in real estate is also around. Worth a look…

  • Small amounts do add up over the years, a quick calculator will show how much they do, that is enough to keep you motivated!

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