3 Better Ways to Invest On a Budget Than Penny Stocks

One of the most pervasive and dangerous myths about investing is that it takes a lot of money to get started. The truth is, it’s never been easier to start investing, even if you only have a few dollars to spare. But not all investments are good homes for your money.

Penny stocks are popular among some people because you can purchase many shares for cheap. But these companies are often small and unproven and many go out of business, leaving investors with nothing. And sometimes, they’re the target of scams too.

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Fortunately, they’re not the only way to invest on a budget. Here are three options you should consider instead.

1. Fractional shares

An increasing number of brokers are enabling their customers to invest in fractional shares of a stock. This is exactly what it sounds like: Instead of purchasing a full share of a stock, you only purchase a fraction of one. So, for example, if a stock is normally trading for about $200 per share, but you only have $50, you could purchase one-quarter of a share of that stock.

This effectively enables you to purchase any stock for the price of a penny stock. You won’t have to take a risky bet on unproven companies. Instead, you can invest in industry leaders whose business models you’re probably more familiar with.

Apart from the fact that you only own a partial share, investing in fractional shares is exactly the same as investing in a full share of a company. If the stock normally pays dividends, you’ll get a fraction of that dividend, equal to the fraction of the share that you own. Continuing our example from above, if the company paid out a $1 dividend per share, you’d get $0.25 because you own one-quarter of a share.

Not all brokers allow fractional share investing, though, so you should verify that this is a possibility before you open an account. You should also look into account minimums to make sure these are reasonable, given your budget. Many brokers also impose minimum fractional share requirements that dictate how small a share you’re allowed to purchase.

2. Index funds

Index funds are another affordable option for those on a budget, and they enable you to quickly diversify your portfolio as well. They’re designed to mimic the performance of a market index, like the S&P 500, and so they end up with similar returns to the index itself.

You’ll always get a little less than the index’s return because the index fund charges some fees. However, index fees are known for being pretty affordable. The best S&P 500 index funds only charge about $3 per year on a $10,000 portfolio.

You can invest in index funds with just about any broker, but again, the company you work with may have investment minimums. If you don’t have a lot of money to spare, choose a broker that doesn’t have this requirement.

3. Exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) are similar in many ways to index funds, which are a type of mutual fund. But while mutual fund share prices are set once per day, ETF share prices rise and fall throughout the day like stock share prices. Beyond that, though, the two are fairly similar. They both enable you to diversify your money quickly and easily with a single purchase, and ETFs are known for offering low fees as well.

You can purchase ETFs through many brokers, and many allow you to purchase as little as one share. Depending on which ETF you plan to invest in, you might only need a few dollars to get started.

Having a large sum to invest is helpful, but it’s not a requirement these days. Consistent contributions are much more important to growing your wealth. Try out some of the investments above and see if your broker enables you to set up automatic transfers to your investment account. Even if all you can do is $5 per week, that money will start to add up over time.

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