Yes, you can invest 20 dollars, or even less, in the United States Stock Market!
For a new investor, this (or any amount) is a great way to get the saving and investing habit going!
A small amount of money didn’t make sense in the past due to commissions on trades, but with the commission free trade environment today and being able to buy fractional shares, it works.
One of the best benefits of investing a small amount (rather than waiting) is that you are removing the barriers to future investing by going through the entire setup process to get the provider selected and the account opened. This takes some effort, which can be one reason why people put it off and don’t invest. Once you remove that barrier, additional investing will be a lot easier!
Let’s look at the options.
In order to invest the 20 dollars, you need to set up an account with a company. Let’s call them a provider. There are a number of providers that you can open an account with. Your first step is to select one.
- Robinwood has commission free trades, fractional shares, and is known for having a user friendly interface
- Webull has commission free trades, fractional shares, and advanced charting tools
- M1 Finance has a $100 minimum, so if you only have $20 to invest you’ll have to rule them out. Otherwise, they are a pretty popular platform used by many investors
- Sofi has commission free trades, fractional shares and offers additional financial planning tools and resources
- Public has commission free trades, fractional shares, and offers a social feed to connect you with other investors
- Acorns has commission free trades, fractional shares, and has a round up feature that allows you to save some money with every purchase. However, it does have a $3 monthly fee so that could be a concern for small balance account holders.
- Stash has commission free trades, fractional shares, and offers automated investing for a $3 monthly fee
Also, the more traditional low cost firms of Fidelity, Charles Schwab and Vanguard are also great choices. I am more biased towards these traditional firms as they are well established and have a good track record. You can set up everything online. Fidelity and Schwab also have the additional benefit of having physical offices around the country if you have an issue or need to talk to someone in person. These firms also have commission free trades and zero account minimums. However, they can change from time to time so be sure to check the latest on their websites.
All the providers mentioned above have no fees or very low fees. This is not the case for other providers. You need to be careful about this. Most banks and Insurance companies offer investments as well. However, these providers tend to have very high fees compared to the choices mentioned above. Fees matter! A 1% fee does not sound like much, but the math of compound interest says otherwise. Over time that 1% fee could result in a retirement balance that is 10-20% (or more) lower than someone that was invested in a very low cost fund. That is a big difference! See this SEC document on the impact of fees. In other words, rather than all that money going to you, it went to the financial institution charging you the high fees!
Finally, be sure to confirm that the provider allows for fractional shares if you want to buy stocks or ETFs. If not, 20 dollars might not be enough to buy a share. If the mutual fund has no minimum, you can invest in one of those funds. For example, Fidelity has a whole list of no minimum investment funds. Some mutual funds have higher minimum initial investments, so check carefully before settling on a provider.
Types of Accounts
Once you pick your provider, you then need to decide what type of account you want to open. This account will hold the investment you purchase with your 20 dollars. Note that all the providers mentioned above will have standard brokerage accounts. However, if you need a custodial or retirement account, be sure to check if they offer those account options. The traditional brokerage firms (Fidelity, Schwab & Vanguard) will offer all the options. Some of the new online firms mentioned previously might not.
The default account would be a traditional brokerage account. This is an account where you buy and sell investments.
If you are not yet a legal adult you will need a parent to set up a custodial account called a Uniform Gift to Minors Account (UGMA) or Uniform Transfer to Minors Account (UTMA). The parent will be your official custodian and your name will also be on the account. When you become a legal adult in your state (usually 18 or 21), the account will be yours.
Another account type would be a traditional Individual Retirement Account (IRA) or a Roth IRA. These tax-advantaged accounts are designed for you to save for your retirement. Once you make that decision you have to follow the IRA rules. The benefit would be tax savings either now or in the future. See this article on the difference between a Traditional IRA and a Roth IRA.
There are other types of accounts (Trust accounts, Donor Advised Funds, etc.) but it is beyond the scope of this article.
Fund Your Investment Account
Once open, you will need to fund your account by electronically transferring funds into your account. This is typically from a bank account (checking or savings) that you link to your investment account.
Once your funds are in your account, you are ready to trade. Your next decision is to determine what investment you are going to purchase with your funds.
There are so many investment choices that it can be overwhelming for many people.
If you already know what you want to invest in, great! You just need to execute the trade. If you are buying individual stocks, you will need to be able to buy a fractional share if the stock price per share is more than 20 dollars.
One of the best ways for most people to start investing are index funds or ETFs (exchange-traded funds). With these funds you can buy hundreds or even thousands of individual companies with your 20 dollars. These are funds where all investors put their money in the fund, and then the fund buys all the companies.
Should you buy individual stocks or index funds? It comes down to risk and reward. This article on individual stocks vs index funds may help you weigh your options.
Whether you are buying an individual stock, and index fund, or and ETF, you will need to know the ticker symbol of the investment. The ticker symbol is what identifies the stock or fund in the market. Usually in the brokerage website (or general internet search) you can look up the ticker symbol. You can also look up the ticker with this Fidelity tool.
Mutual funds are another common investment choice. However, they often have higher fees and higher minimum investments. You will need to check the minimums for some of these funds to see if you qualify. Some funds, as mentioned above, have no minimums.
These articles may be of value to you when looking for index funds:
- Best Fidelity Index Funds for a Low Cost Portfolio
- Charles Schwab: Best Low Cost ETFs and Index Funds
- Best Small Cap Index ETFs to Compliment your Equity Portfolio
Why save and invest?
There are lots of reasons to save and invest. You could be saving for a spending need in the short term (car, house, educational purposes, etc), or you could be saving for your long term financial goals. Compounding is one of the amazing wonders of math. The earlier you start, the less you need to invest to hit your goal due to the power of compounding. In order to be financially independent down the road you need to save and invest on a regular basis. The end result could be the greatest purchase of all, which is financial security and your time freedom (work is optional)! Once you determine your investment goals you can then select the assets that fit with your goals.
If you are saving for the short term, the conventional wisdom is to invest your money in low risk investments such as money market funds or high-yield savings accounts. The reason is that higher risk investments such as stocks could have a sudden down turn that take a number of years to recover. The time to recover could be too late for your short term need.
An emergency fund would be another savings goal. The recommendation from the typical financial advisor would be to save 3 – 6 months in necessary living expenses as a form of financial cushion should you lose your job, become unable to work, or have unexpected medical, home or car expenses. The overall point of this is to have some savings should the need arise. Most will argue that this should be low risk money in a traditional savings account or money market account. Others will say that if you invest this money in something with a higher return it will grow much larger over time rather than just sit there as “dead money.” Both arguments have merit. Based on your risk tolerance, you can make the investment decision that is right for you.
When considering long-term investments, however, equities become an important portion of most portfolios. You will need to decide if you are going to buy individual stocks, ETFs, Index funds, or Mutual funds. An individual stock is, of course, 100% in the stock market. An ETF, index fund, or mutual fund can be 100% in the stock market but it does not need to be. Some funds can be a mixture of stocks, bonds, etc.
Individual stocks have more downside risk than an ETF or fund due to the concept of diversification. Diversification is analogous to the old saying, “don’t put all your eggs in one basket.” This is to protect you on the downside. If your individual stock goes to zero because the company fails, you lose 100% of your investment. If you invest in a fund that has 1,000 companies and one fails, you lose a very small portion of your investment. That’s a big difference!
There are also ETF and Index Funds that are set up as Real Estate Investment Trusts (REITS). These are funds that invest in commercial real estate, apartment buildings, and other related assets. These funds allow individuals to invest in the real estate market by buying individual shares instead of large direct investments needed for traditional real estate investing. There are a few REIT funds in the Vanguard Real Estate ETF and the Schwab US REIT ETF.
A brief opinion about money options
Remember, your money has to go somewhere. Some of your choices include cash in a savings account, Certificates of Deposit, money market accounts, stocks and related equities, real estate or REITs, commodities, etc. Even cash under your mattress is an option, albeit not a good one. The point is that once you have some savings, you are in the game. Once you are in the game, you are in the game.
No decision is a decision (the money has to go somewhere). “Safe investments” (such as cash), are not as safe as we may think. Yes, it is not subject to daily market fluctuations, but instead it is slowly eaten alive by the invisible inflation monster. Said differently, there is nowhere to hide. You are in the game. That being the case, getting invested and diversified are some of your best weapons to build wealth and win the game.
Executive Summary: Can I Invest 20 dollars in the stock market now?
- Yes you can! With today’s providers you can invest $20 or even less
- Going through the process of getting a little money invested will pave the way to get a lot of money invested later on!
- First you need to select the provider who is going to administer your account
- A standard brokerage account, custodial account (for minors), or tax-advantaged retirement account would be your next decision
- You can then fund your investment account
- It’s important to decide why you are saving – you should have a goal
- Once funded, you can select your investment
- You can buy individual stocks, ETFs, REITs, index funds and more
- Watch out for fund investment fees which can eat up your returns over time
- Choose carefully and get diversified, your financial future is too important to wing it!