Most people wait to start investing until they have a significant amount of money saved up. This made sense a few years ago for two reasons:
- Mutual fund companies had high account minimums — some were as high as $3,000.
- Brokerage firms also charged high fees, which ate up the returns of small accounts.
But now there are high-quality, low-fee investment providers that let you get started for $50 (or even less, in some cases).
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.
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 (like credit card balances), it’s in your best interest to hold off.
The stock market has returned an average of about 7% per year after inflation.
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) famously said, “our favorite holding period is forever.”
In other words, go in with the mindset that you’re going to hold your investments long-term (or at least five years).
If you’re going to need your money in a month or even a year, the stock market isn’t the right place to put it.
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. That includes dividends and gains if you were to sell. Examples of taxable accounts include standard brokerage accounts, like the ones you’d get by signing up with TD Ameritrade or Robinhood.
With retirement accounts, such as IRAs and 401(k)s, taxes are either deferred or paid upfront.
The difference between these account types is huge!
Let’s say you invested $50 per month for 40 years (between the ages of 25 and 65). If you placed those funds in a taxable account, you might end up with a figure around $50,000. If you placed them in a traditional retirement account, that figure might be closer to $75,000.
These figures are completely hypothetical and used here for teaching purposes only. Your actual returns would vary depending on many factors, including your investment choices and the overall economic environment. However, these figures (as illustrated in the chart below) show the impact of fees and taxes on the value of your portfolio over time.
Taxes eat away at your gains, so it’s important that you pick the right investment account. If your employer has a 401(k) and offers an employer match, this is a great place to start. You won’t come close to matching the returns your employer’s 401(k) match will provide.
If you don’t have access to a 401(k) with an employer match, I’d recommend a Roth IRA. A Roth IRA allows you to contribute after-tax money today, then withdraw that money tax-free starting at the age of 59 1/2.
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 Amazon, Facebook or Tesla.
However, if maximizing your returns is your goal (which it should be), that may not be in your best interest.
First, many investment firms don’t allow you to buy fractional shares. As I write this, a share in Amazon is trading around $2,000. You’d have to buy an entire share to just to get started.
But the most important reason why you might not want to buy individual stocks is because most investors don’t succeed with that strategy.
Few investors are able to pick individual stocks and beat the market. They might get lucky once or twice, but study after study has 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, an S&P 500 index fund holds stock in all the companies that make up the S&P 500 (which includes the 500 largest companies in the U.S.).
There are a number of advantages to investing in index funds, especially for those wondering how to invest $50 in the stock market:
- 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 incur minimal taxes
- Low maintenance — you get a totally hands-off investment that beats 80% of investors
Further Reading: Best Investing Books for Young Adults
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 still have minimum deposits that start at $1,000.
Fortunately, there are a few good options I’d recommend to someone looking to invest a small amount.
Option #1: Betterment
First on the list is Betterment.
Betterment is what’s known as a robo-advisor.
One of the reasons why I recommend Betterment is because getting started is incredibly simple. Instead of making you pick from 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 investments.
Just as important, their fees start at only 0.25%, and they have no minimum investment amount. That means you can get started for as little as $1.
Learn more about the company in my comparison of Betterment vs. Vanguard.
Option #2: M1 Finance
An alternative to Betterment is M1 Finance.
M1 Finance allows for a bit more customization of your portfolio. For example, if you wanted to invest 90% of your portfolio in index funds and 10% in individual stocks, the platform allows you to do so. (By the way, that 90/10 ratio is a decent compromise for those wanting to pick at least a few individual stocks on their own.)
You can read more in my detailed M1 Finance Review.
Option #3: Acorns
One other option worth considering for small investors is a micro-investing app called Acorns.
While you can make automatic contributions to your Acorns account, the company is best known for its round-ups feature. How it works is that every time you buy something, Acorns rounds up your purchase to the nearest dollar. Then, once a day, Acorns invests your “spare change” into your portfolio.
For example, if you purchase a coffee for $3.75 with a linked credit card, Acorns will invest 25 cents.
The downside of Acorns is that there’s a $1 monthly fee, although you can get four years of free service if you sign up using a valid .edu email address.
Learn more about Acorns on their website.
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 next.
First, you want to set up an automatic deposit into your investment account.
Ideally, set up a recurring transfer from your checking account to your investment account for the day after your paycheck hits. This will help you make sure you actually move the money over (rather than using it for some other purpose).
Next, challenge yourself to increase the amount you’re investing.
If you increase the amount you invest by $10 each month, you’ll be up to $170 per month after just a year.
Next is being patient.
Investing is a long-term game. Those who win are those who are patient. This isn’t gambling, and you’re not going to find the next Google or Amazon — your goal is steady, consistent gains that compound over time. That may sound boring, but it’s the best way to grow your wealth.
You may want to check in every month or so to see how your investments are doing. That’s fine! Just don’t get too concerned if your portfolio value drops. Down markets are inevitable. Be patient. The last thing you want to do is sell when your investments have bottomed out.
And remember, that dip is just one brief moment in time. Remember the financial crash of 2008, when investors lost billions upon billions of dollars seemingly overnight? Well, here’s how that dip looks a little over 10 years later, on a chart showing the ups and downs of the S&P 500:
The worst crash in market history looks like little more than a blip on the radar.
So stick with it and have faith, even when things are looking ugly. That trend line is sure to take a sharp turn down at some point sooner or later, and that’s just fine — you’re in this for the long haul.
Further Reading: Micro-Investing Apps: What You Must Know & 4 Best Apps of 2019