How to Invest Your First $500 in the Stock Market

Want to invest in the stock market but don’t think you can afford it? Think again!

Given the high prices of stocks, the relatively high initial investment minimums of many brokerage firms, mutual funds and exchange traded funds (ETFs), you may think you won’t be able to invest in the stock market with $500. But you’d be wrong!

Although your investment options will be limited, you’ll still be able to invest in the stock market and come out with a decent profit.

You just have to be selective about where and how you invest your money.

Choose Mutual Funds or ETFs

Since you have a limited amount of money to invest, your best option is to choose mutual funds or exchange traded funds (ETFs), so you can diversify across a wide range of stocks.

The best choice will be index funds, particularly those that track the general stock market. This will enable you to participate in the growth of the market without being exposed to the punishing sell-offs that sometimes hit individual stocks or market sectors.

Charles Schwab offers the Schwab S&P 500 Index Fund (Symbol: SWPPX) with a minimum initial investment of $100.

The only catch? You have to invest $100 per month after that.

Invest in Penny Stocks

If you prefer to trade in individuals stocks, you can do so but will need to limit your choices to “penny” stocks. Penny stocks aren’t literally stocks that have prices quoted in pennies — though they can be — but are defined as stocks that trade for less than $5 per share.

With $500 you can buy 100 shares of a $2 stock, and 100 each of two stocks that trade at $1.50 each. This will allow you to achieve some diversification. But of course that will be achieved entirely within the realm of penny stocks, and that’s a high stakes game.

While penny stocks have great potential to rise in price, they usually have even greater likelihood of crashing completely.

They’re usually (but not always) stocks in very new, very speculative, and little known companies, and probably not the best choice for you if you have only a small amount of money to invest.

Try Odd Lots of Name Stocks

A better approach, if you want to invest in individual stocks, is to invest in small lots of name stocks. For example, with Oracle trading at around $30 per share, $500 will buy 16 shares, allowing some room for transaction fees.

You will be allowed to buy name stocks, but diversification would be close to impossible.

This will be complicated by the fact that a broker may charge a higher fee for “odd lot” transactions — transactions involving fewer than 100 shares. And below a certain minimum number of shares they may not want to execute the trade at all.

Use a Discount Broker

With $500 you will need to use a discount broker to execute your trades — full service brokers and their higher commission fees won’t make financial sense. There are many options when it comes to discount brokers, but your relatively small initial investment will limit your options, as many require higher amounts just to open an account.

E*TRADE will allow you to open a brokerage account with a minimum of $500. Commissions are $9.99 per trade. That’s not the best commission rate available, but you can switch to a broker with a lower rate when you have more money to invest.

No matter what firm you invest with, be sure to keep your trades to a minimum. At nearly $10 per trade — or even $5 — you can eat up a lot of investment capital in a real hurry, if you are an active trader.

Get More Investment Options by Increasing Your $500

If you begin investing with $500 it’s important to think of it as a solid starting point. Once you open an account and begin investing, your next move should be to grow your investment stake.

You should plan to add at least $50 to $100 per month through payroll contributions (you can direct deposit money into many investment accounts) or some other regular contribution method.

If your initial investment is $500, and you add $100 per month, at the end of the year you will have $1,700 in invested funds — plus investment income earned.

As your investment fund grows, so will your investment options. You will eventually be able to invest in funds with higher initial investment minimums, as well as individual stocks.

And if you plan to be an active trader at some point, having a larger amount of capital to invest will be absolutely essential.

But in the meantime, never allow the fact that you have “only” a few hundred dollars to keep you from investing in the stock market.

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