Latest posts by R.J. Weiss, CFP® (see all)
Most wait to start investing until they have a significant amount saved up. This made sense a few years ago for two reasons:
- Mutual fund companies had higher minimums
- Brokerage firms charged such high fees which ate up returns of small accounts
But now there are high-quality, low-fee investments one can make for under $50.
If you’re wondering how to invest $50 in the stock market (or any small amount for that matter), this article can help you get started. By the end of this post, you’re going to have an investment strategy that’s going to place you in the top 20% of investors.
How To Invest $50 In The Stock Market
Before You Start Investing
Before you start investing in the stock market, you want to make sure it makes financial sense.
The # 1 reason why you shouldn’t start investing is high interest debt. If you still have high-interest debt, it’s in your best interest to hold off.
The stock market has returned on average of about 7% a year.
So, if you have debt at a higher interest rate than 7%, paying that off is your best investment. It’s also a guaranteed rate of return, something the stock market can’t provide.
Next is understanding that investing in the stock market is a long-term commitment. Warren Buffett (one of the greatest investors of all time) said, “our favorite holding period is forever.”
In other words, go in with the mindset that you’re going to hold this investment long-term (or at least a decade).
If you’re going to need this money in a a month or even a year, the stock market isn’t the place to be.
A good strategy here is to build an emergency fund.
Once you have your high-interest debt paid off and an emergency fund (I’d recommend at least a month but ideally 3 months of expenses), it’s time to start investing.
Taxable Accounts vs. Retirement Accounts
There are two primary types of investment accounts.
- Taxable Accounts
- Retirement Accounts
In a taxable account, any income earned is taxable. This includes dividends and gains if you were to sell.
Retirement accounts, such as IRAs and 401(k)s, taxes are either deferred or paid upfront.
The difference between these accounts is huge!
If you invested $50 a month between the ages of 25-65.
In a taxable account, at the age of 65, you’ll have $51,055. In a traditional retirement account, at the age of 65, you’ll have $75,137
Here’s the breakdown:
Taxes eat away at your gains, so it’s important you pick the right investment account. If your employer has a 401K and offers an employer match, this is a great place to start.
If you don’t have access to a 401K with an employer match, I’d recommend an IRA.
Why You Don’t Want To Pick Stocks
You might be thinking that you want to take your $50 and invest it in a company like Facebook or Tesla.
But, if maximizing your returns is your goal (which it should be) that may not be in your best interest.
If you’re investing $50, fees will eat away at your gains. At a low cost brokerage account, you’re still going to be paying about $5 a trade. So, instead of investing $50 you’re actually investing $45.
Second, many investment firms don’t allow you to buy fractional shares. As I write this a share of Tesla is trading around $300. So, you’d have to buy an entire share to get started.
But the most important reason why you don’t want to buy individual stocks is most investors don’t succeed with this strategy.
Few investors are able to pick individual stocks and beat the market over the long-term. They might get lucky once (and tell a lot of people about their luck) but study after study have shown that few succeed in the long run.
To quote Warren Buffet again,
“Just pick a broad index like the S&P 500. Don’t put your money in all at once; do it over a period of time. I recommend John Bogle’s books — any investor in funds should read them. They have all you need to know….if you invested in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time.”
What Is An Index Fund?
An index fund is a mutual fund that holds a collection of stocks.
For example, the S&P 500 index fund holds the stocks of all the companies in the S&P 500 (the 500 largest companies in the U.S.).
The advantages of index funds, especially for those wondering how to invest $50 in the stock market are:
- Low Fees – Instead of paying a commission every time you invest, index funds charge one very low-rate.
- Tax Efficient – Because they don’t trade a lot of stocks, index funds occur minimal taxes
- Low Maintenance – You get a totally hands off investment that beats 90% of other investors!
Where You Can Invest As Little As $50 In The Stock Market
The one downside to getting started with as little as $50 is that you’re limited to certain investment providers.
Many investment firms have minimum deposits that start at $1,000.
Fortunately, there is one very good option I’d recommend to someone looking to invest a small amount.
Betterment is what’s known as a robo-advisor.
The reason I recommend Betterment is getting started is incredibly simple.
Instead of making you pick among hundreds of mutual funds, Betterment starts you off with a risk tolerance questionnaire. Then, they give you options based on your risk profile.
Their portfolios are made up of index funds, so you’re getting quality investment.
Just as important, there fees start at .25% and they have no minimum investment. So you can get started for as little as $1.
To get started, take the risk tolerance questionnaire at the bottom of this page.
How To Invest $50 In The Stock Market: After You Invest
Once you’ve made your first investment, you may be wondering what to do from here.
First, you want to setup an automatic deposit into your investment account.
Ideally, set up a transfer from your checking account to your investment account the day after your paycheck hits.
Next, challenge yourself to increase the amount you’re investing.
If you increase the amount you invested by $10 each month, in a year you’d be saving $170 a month.
Next is being patient.
Investing is a long-term game. Those who win are patient.
You may want to check in every month or so to see how you’re investment is doing. However, don’t get to concerned if your investment drops. Down markets are inevitable. But fight through them. The last thing you want to do is sell, when your investment has bottomed out.