If you have ever considered starting a stock portfolio but were worried you didn’t have sufficient funds, you wouldn’t be alone, but did you know it is still possible to begin your investing journey even with a small amount of capital?

The good news is that there are many options for investing with limited funds, including fractional shares, exchange-traded funds (ETFs), and flexible trading apps. While buying stocks might not be the right financial move for everyone, starting your portfolio typically does not require a substantial amount of money.

Before you invest any money in the stock market, you should at least be familiar with the basics of investing, your goals, and have a budget in mind. Starting a portfolio is an integral part of planning for the future and growing wealth, but there are several factors that you should keep in mind before buying any investment.

Investing for Beginners with Limited Funds
Investing with limited funds is a viable option for many investors. However, people hold varying viewpoints regarding what constitutes “low” or “limited” funds. You must never forget that even if a stock appears to be a conservative or safe, all investments have a degree of risk. The crucial aspect of investing is to use money that, if lost, will not lead to financial hardship. You should never invest money you cannot afford to lose. It is important to look at your current income, expenses, and savings to create a plan and a budget. 

Once you are comfortable with your budget, ask yourself the following questions to see if you may be in a position to start investing.

Do you already have an emergency fund?
While investing will help you grow wealth and reach your long-term goals, you should always ensure you have enough money saved for unexpected expenses or a job loss. Typically, an emergency fund includes 3-6 months of living expenses, but this can vary based on an individual or family’s situation. Before you start investing, analyze your current and upcoming expenses to determine how much is needed to fund your savings.

Is your high-interest debt paid off?
Ensuring that any high-interest debt is paid off before investing in the stock market is essential. The upside of some stocks may seem like a way to make easy cash, but investing is not a gambling strategy. Your high-interest debt will likely outweigh market returns. 

Every situation is unique, and you should review your current debt and interest rates. If you have credit or loan debt greater than 5-6%, you might consider paying your debt before diving into the stock market. 

Are you planning to borrow funds to invest?
Borrowing funds to invest in a stock with growth potential can be tempting. However, investing with borrowed money is risky, as investments come without assurances. If your investment takes a downturn, there’s a possibility of losing all (or a substantial amount) of your capital while still being obligated to repay the loan with interest. When borrowing money to invest, the potential losses could surpass your initial investment due to the added burden of repaying the loan’s interest.

Have you contributed to your 401(k)?
Although contributing to an employer-sponsored 401(k) is only sometimes the optimal choice compared to other account options, you should review your plan if you have access to a 401(k) through your employer.

If your employer offers a 401(k) match, it is definitely worth looking into this option before investing in stocks through a brokerage account or IRA. Employer matches are a great way to grow your savings without using your own money. It is crucial, however, to review 401(k) fees and fund options before making this decision. 

What are your investment goals?
Determining your investment goals will help you determine your risk tolerance and the time horizon for withdrawing funds. Consider why you want to invest, such as to save for retirement or a child’s education.

A journey of 1,000 miles begins with a single step
Considering the questions listed above, you might find yourself with limited funds available for initial investments. Despite its modest beginnings, the process of amassing wealth takes time. You should not become disheartened if you’re in this situation. Even embarking on your investment journey with a small starting capital can signify a constructive step toward shaping your future.

I’m Ready to Get Started: How do I Buy Stocks?
So, you’re ready to start investing but need help knowing where to begin. Luckily, many trading platforms make it easy to get started. First, you will need to create an account with a trading platform or broker. These platforms vary, as some cater to beginners with relatively low balances, while others focus more on intermediate and advanced investors.

Many platforms offer commission-free trading for stocks, which helps investors save money on fees. As a beginner with limited funds, consider opting for a discount broker rather than a full-service broker with high costs. Examples of platforms that offer commission-free trading for stocks and that are easy to use for beginners include:

  • Robinhood
  • Webull
  • Fidelity
  • E*Trade
  • Charles Schwab
  • Vanguard

It is important to look at a comprehensive list of fees and the required minimum balance before opening an account. These platforms offer commission-free stock trading, though they do impose fees for advanced investments like options trading, and there might also be annual account fees to consider. Review current policies and expenses for each platform, as these can change.

Many platforms will also offer new users promotions, including free stocks or cash to get started. These promotions can be a great way to jump-start your investing journey with an account opening incentive. Look at all the trading platforms available to determine the best current promotions. 

Micro Investing
In addition, there are also trading apps that offer even more flexibility than traditional platforms. These apps allow investors to get started with just a few dollars – or by rounding up their spare change. Examples of popular apps include Acorns and Stash. 

Even if your available funds are low, micro investing can be a great way to gain exposure to the market without causing a financial hardship. 

Other Considerations for Limited Fund Investing
Traditional stocks may not be accessible to all investors. Luckily, if you have limited funds and want to achieve a diverse portfolio or own part of a specific stock, you have options.

Fractional Shares
You do not need to purchase full stock shares if you have limited funds. With some stock prices being unreachable for many investors, purchasing fractional shares can be a great alternative. Instead of buying a full-price stock, you can purchase fractional shares. Therefore, you can buy the stock within your budget. The advantage of this is that you can create a diverse portfolio with many stock holdings.

Many brokers allow the purchase of fractional shares, but investors should be aware that it could get complicated if you switch brokers and need to transfer these shares.

Index Funds
If you are investing with limited funds, index funds are also a great way to diversify your portfolio at a low cost. Index funds allow you to own a fund that tracks an index – such as the S&P 500. Examples of ETF index funds include SPDR S&P 500 ETF Trust (SPY) and iShares Core S&P 500 ETF (IVV). 

You can also purchase index funds in the form of mutual funds. However, an ETF, or Exchange Traded Fund, is a low-cost and tax-efficient alternative.

Understanding the Stock Market
If you are a novice investor with limited funds and disposable income, it is critical to understand the stock market and the risks that come with investing. A wide range of opportunities exist, encompassing both conservative and risky investments (with varying growth potentials).

The purchase of a blue chip stock with moderate upside potential may only interest some investors, but avoiding highly speculative, risky investments such as penny stocks should be avoided at all costs. If you have limited funds to invest, it is better to stick with established stocks or index funds.

Investing and Taxes
Another consideration for your strategy is taxes, as you will owe money on capital gains if you sell an investment. However, you can do a few things to enhance your tax efficiency to protect your returns.

First, you must decide what type of account(s) you plan to open. Brokerage accounts are considered taxable accounts with no tax benefits, while retirement accounts like a Roth IRA or Traditional IRA offer tax-exempt or tax-deferred benefits. Certain types of investments, such as ETFs, can also provide tax benefits.

The Bottom Line
In addition to understanding the basics of investing and deciding whether now is the right time to invest, you must recognize that while getting started with limited funds is both practical and normal, there is little chance that you will see significant returns right away. Consistent contributions and intelligent decision-making can help you grow wealth over time through stock investing – even with limited funds.