Investing can seem intimidating when you see experts advising workers to put away 100k by 35 or aim for over a million by retirement. But you don’t need a ton of money to buy into the stock market. In some cases, you can get started with little money.
Stocks and exchange-traded funds can only be bought in whole units at many brokers. Depending on the company or fund, that could mean thousands of dollars for a single share. But some financial companies are changing those requirements. Now, firms including Charles Schwab, Robinhood, Square, SoFi and Stash all allow investors to buy fractional shares of individual stocks and, in some cases, ETFs.
“This is a start in the right direction,” Ryan J. Marshall, a New Jersey-based certified financial planner, tells CNBC Make It. “Allowing for fractional shares of ETFs will open up the market for more investors.”
If that sounds enticing, here’s what to keep in mind.
Invest in mutual funds first
It’s certainly positive that investing is getting cheaper on the whole for the average investor. But if you’re a novice, you’re going to want to stick to buying low-cost funds that track an index like the S&P 500, rather than picking and choosing individual companies to invest in.
“If you can only afford fractional shares of a stock, then you probably shouldn’t purchase the stock in the first place,” says Marshall.
These funds have relatively cheap fees and give you exposure to broad swaths of the stock market, which are key factors in building wealth. Stock picking by itself is a losing game — no matter how much research you put in, you’re probably not going to beat the market, and studies indicates time and again that passively managed funds perform better than actively managed funds.
“In today’s environment, most people are running around worried about their careers, their family, what time soccer practice is on Tuesday and simply don’t have the time to monitor and research individual stocks,” says Marshall. “Either leave it up to mutual funds managers to make those calls or own the market in an index fund. Both provide great diversification and lower entries costs.”
Buying fractional shares has always been possible when buying mutual funds, according to a spokesperson from Fidelity; it’s essentially what investors do when buying into funds through a 401(k). Now, the ability to buy fractional shares is expanding to ETFs and stocks too, which you’d typically buy through a taxable brokerage account.
“The individual investor is better suited by investing in mutual funds and exchange-traded funds,” Greg McBride, chief financial analyst at Bankrate, told CNBC Make It. “But the lure of individual stocks is always there. On some level, so is the belief that doing so enables the investor to beat the market, which has proven not to be true.”
Then buy individual stocks
That said, if you’re already contributing a healthy amount to a retirement investment account like a 401(k) or IRA but want to dip your toe into individual stock trading, buying fractional shares can be a good starting point.
This way, you can invest in expensive companies like Amazon or Alphabet without the near-$2,000 necessary to buy a single share (Amazon was trading for close to $1,900 on Friday; Alphabet was at just over $1,400). It’s also an effective way for to test out a company before committing a large amount of money.
Again, it shouldn’t be your sole investing strategy, but if you want to build on your retirement accounts, it’s a good entry point. CNBC’s Jim Cramer says the first $10,000 you invest should go to a low-cost index fund or exchange-traded fund that mirrors the S&P 500.
After that, you can start researching individual companies to invest in if that’s part of your overall financial plan and you have the time and resources to do so.