Look for the best things you can buy for $ 100 and you might see drones, hoverboards, and voice-activated coffee makers. Fun stuff, sure, but you can take a different angle with $ 100. Invest it and get on the road to financial independence. Here are four affordable ways to get started.
1. Exchange traded funds
Exchange Traded Funds (ETFs) do not have the minimum investment thresholds that you will find with some mutual funds. You can buy a single share if that’s all you can afford.
An ETF that tracks S&P 500 is a good place to start. This would give you exposure to 500 of the country’s largest state-owned companies, including Apple, Amazon, Alphabet, and You’re here (NASDAQ: TSLA). To invest in these names individually, you would spend over $ 6,000 to buy a single share of each.
Two S&P 500 ETFs that trade at less than $ 100 per share are the SPDR S&P 500 ETF Portfolio (NYSEMKT: SPLG) and the ETF SoFi Select 500 (NYSEMKT: SFY). The SPDR fund is a traditional index fund that seeks to replicate the performance of the S&P 500. The SoFi fund has a growth spin; it weights its holdings differently from the index to maximize growth.
When looking for index ETFs, pay attention to the expense ratio and tracking error of each fund. A lower value is better for both values. The tracking error is the difference between the performance of the fund and the performance of the underlying index. The expense ratio should account for the bulk of the tracking error.
2. Dividend shares
Dividend stocks are another good choice when your investment budget is tight. You can reinvest your dividends automatically, so your position grows with less money out of your pocket. Three popular dividend stocks that trade for less than $ 100 per share are Coca Cola (NYSE: KO), Alliance of Walgreens boots (NASDAQ: WBA), and Verizon (NYSE: VZ).
To value dividend-paying stocks, look for signs that the dividend is sustainable. You want to see a payout ratio of less than 75%, sufficient and consistent cash flow, growing profitability, and manageable debt levels.
You forgo diversification if you start your investing career with one or two dividend-paying stocks. This can leave you with more volatility than you want. For this reason, you may prefer to start with ETF stocks and then gradually increase your stock portfolio to 20 or more positions over time. Or, you can invest in fractional stocks, explained below, for immediate diversification at a lower price.
3. Fractional shares
Some brokerage firms allow you to buy shares in units of less than one. These are called fractional actions. They generally work the same as full stocks, but on a smaller scale. If you buy half of a dividend stock, you would pay half the normal share price and earn half the dividend per share.
The rules for fractional investing vary from broker to broker. Conditions to watch out for are minimum purchase amounts, investments available for split purchases, fees charged for buying or selling split stocks, and the time it takes to settle a fractional order.
Choose your broker carefully because you don’t want to move out later. You generally cannot transfer your fractional shares from one broker to another. You will need to sell the fractional position first and then move your money.
4. Target date fund in your 401 (k)
If you have a 401 (k), use your $ 100 to increase your pension contributions. 401 (k) s will invest any dollar amount, so you don’t have to worry if that’s enough to cover a single stock. In addition, you will benefit from immediate tax relief on the increase in contributions. You can also get a matching contribution from your employer.
Many 401 (k) s offer a Target Date Fund (TDF) as an investment option. TDF Portfolios typically contain stocks, bonds and cash, in a composition that becomes progressively more conservative as retirement approaches.
This aggressive-to-conservative adjustment follows a specific pattern, called a descent path. Carefully examine the descent path of your fund. If you agree with the approach, this fund is the only position you need in your retirement account.
Invest in you
What makes the most sense: spend $ 100 on a cool gadget or invest $ 100 and change your life for the better? The answer is simple. Start small, with a single share of funds or fractions of shares, and scale up your investing activity according to your budget. Stick with it and you can turn that $ 100 into thousands, then tens of thousands – which should ultimately be a lot more fun than any gimmick.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.