Small investments can generate big returns


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It’s a common misunderstanding that a person must already have a lot of money in order to invest. But that’s just not true. Warren Buffett’s first investment was to buy three shares of a gas company at $38 each.

You can invest $1,000, $500, $50 or even $25 in a number of different ways. As long as you pay attention, do your research and understand the vehicle in which you’re investing, the return could well exceed the risk.

Are small investments right for you?

One of the first keys to making small investments work is simply to develop good habits of building savings and paying down debt. Small contributions toward each of those, whenever you can afford them, will add up over time.

A smart first strategy is to contribute as much of your paycheck as you can afford to an employer-sponsored retirement plan. Even a percent or two can have big benefits when coupled with the tax savings and any employer match.

How to make small investments

There are many different investment vehicles suitable for small amounts of money. Most people might think first of individual stocks. Times have changed since Buffet bought his first shares in 1941. Online discount brokerages make it easy to purchase shares in companies with a fee per trade as little as $5.

Meanwhile, mutual funds offer a diversified portfolio of stocks that can mitigate risk. Most funds require larger minimum investments than you may have in mind, however—some require up-front commitments of thousands of dollars. But certain funds allow initial investments of $100 or less, as long you promise to make automatic regular contributions.

Another variation on a mutual fund, meanwhile, is an exchange-traded fund. ETFs are index funds that are themselves traded on an exchange. They can be much less expensive, with participation often possible for just the cost of a single share, typically less than $200, and low management fees.

Still another option, especially for the risk-averse, might be U.S. Treasury securities or savings bonds. They won’t offer huge returns, but allow for investments of $100 or more that pay dependable interest. You can buy them via the portal.

Dividend reinvestment plans also have a low cost of entry. DRIPs enable investors to bypass brokers when buying individual company stocks. Usually the only requirement is the ability to buy a single share. DRIPs offer low or nonexistent fees and the ability to reinvest company dividends into your account (enabling the purchase of more stock).

Make your small investments grow

Over the past decade or so, several startups have emerged that offer their customers easy and inexpensive ways to invest. For instance, Lending Club is a network that enables peer-to-peer, or social, lending—a form of debt financing that eschews traditional institutions. By investing small amounts in those loans, you can earn interest from the site’s borrowers as they repay them.

Other options include sites such as Betterment and Motif. The former is a “robo-advisor” that can help manage an investment portfolio for a low fee based on what you tell it about your tolerance for risk; it then creates a portfolio of ETFs and manages them as you make monthly small investments of $100 or more. Motif, meanwhile, is a “concept-driven trading platform” that allows for the creation of small funds characterized by specific criteria (robotics, say, or green energy). Accounts are free to open and you can invest in a particular “motif” for just $300.