Many people believe that you need thousands of dollars to invest. This is simply not true. You can invest with as little as a few dollars if you really wanted to. Ideally, I would suggest waiting until you have more than that, though.
Before investing, there are a few things to consider. First, I would make sure you have paid off all high interest debt (i.e. credit card debt). The reason for this is you want your rate of return on your investments to outweigh the interest rate on your debt, or else you net out paying more money than you are making. Second, you want to make sure you have enough liquid assets for emergency purposes, such as money set aside if something happens to your car or something breaks in your house.
Once you feel comfortable financially, I would suggest saving up a minimum of $1,000 before investing your money. If you are comfortable saving $1,000 without defaulting on paying any bills or everyday expenses, this is a good indicator this money can be tied up in investments.
Once you’ve saved up the money, you are ready to determine what kind of investment account you would like to open. You can open a brokerage account, retirement account, or custodial/guardian account.
Brokerage accounts can be individual or joint accounts. It is a standard investing account in which there is no defined purpose for the use of funds and, therefore, no real restrictions on withdrawals or use of the funds once deposited into the account (unlike retirement or custodial accounts). These accounts can be used to buy or sell stocks, options, mutual funds and more.
Retirement accounts for an individual investor, rather than employee-sponsored or self-employment, come in the form of a traditional IRA or Roth IRA. A traditional IRA is a retirement savings account that provides tax-deferred growth and potentially tax-deductible contributions. These accounts are great for those looking to build their retirement nest egg. The main benefit of a traditional IRA account is that the gains grow tax free, this includes capital appreciation gains and dividends received. Contributions are also tax deductible if your income is below the threshold determined by the IRS (see table below for 2016 thresholds).The downfall to the traditional IRA is that funds are taxable when withdrawn, after the individual reaches age 59 ½. A Roth IRA is a retirement savings account that is not tax-deductible and is not taxable if withdrawn after the individual reaches the age of 59 ½. The main benefit and distinction here is that gains grow tax free and the withdrawals are also tax free. So while the investor may not receive a taxable deduction upfront like on a traditional IRA, they are able to withdraw the funds tax free once over the age of 59 ½.
Custodial/guardian accounts are managed by one individual for the benefit of another. A regular custodial account is managed for the benefit of a minor and is terminated once that individual reaches a certain age. Another popular custodial/guardian account is the Coverdell Education Savings Account (ESA). An ESA allows the contributor to make contributions until the beneficiary reaches the age of 18. These contributions are not tax-deductible and are not taxable as long as the funds are used for qualified educational expenses.
For beginner investors looking to enter the market, you may want to consider an index fund. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (see below for an example). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover which is why it’s great for the beginner investor. If you are beginning with $1,000 to invest, the index fund allows you to diversify your funds across a large number of stocks which reduces the risk and exposure to any one company.
Before making an investment it is crucial to do your own research in order to understand what you are buying and how it works. Think about your investment choices similar to other purchases. There are countless sources providing research on investments, such as the brokerage providers, Yahoo Finance, MorningStar, various financial blogs and more. Nowadays, people won’t even make simple purchases online without reading up about an item, so there is no excuse not to do your research on your investments.