Beginner’s Guide: How To Invest Your First $1,000, $5,000 or $25,000

If you’ve already saved $1,000, $5,000 or $25,000 for investing, congratulations! Sometimes the biggest hurdle to investing is tucking away those first small sums. But now that you’re in the habit of saving, it will get easier and easier. The question is, what is the best way to invest those amounts of money?

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While there is no one right answer for every investor — and you should consult your financial advisor before you make any rash decisions — there are certain investments that are better suited for different amounts of money. Here’s a look at investments you might want to consider depending on whether you have $1,000, $5,000 or $25,000 set aside.

With your first $1,000, you’re just dipping your toes into the waters of the investment world. While there used to be limited options for beginners with just $1,000 to invest, now you can access fully diversified portfolios that are professionally managed. You can even afford to pick individual stocks, if that’s your preference.

Buying shares of individual stocks used to be squarely off limits to investors with just $1,000 to sock away. And while you won’t be buying individual shares of, say, Amazon at any time — as the stock price is currently in the neighborhood of $3,200 — you can now buy fractional shares of nearly any stock you’d like. With fractional share purchasing, you simply tell your broker how much you’d like to spend buying a particular stock, rather than how many shares you’d like to purchase, and you’ll receive the equivalent amount of fractional shares. For example, if you have $1,000 and would like to buy Amazon stock, with a fractional-share broker you could buy about 0.3125 shares at current prices. Your fractional shares will still go up and down the same percentage amount as the company’s full shares of stock, making the actual share price essentially meaningless.

Although not all brokers offer fractional share purchasing, the number is growing every day. Major brokers like Charles Schwab offer fractional shares of certain stocks, while firms like Interactive Brokers, M1 Finance and SoFi also offer fractional share purchasing.

Robo-advisors are a way for smaller investors to gain access to diversified, professionally managed portfolios without having to pay high fees or meet large deposit requirements. A robo-advisor allocates money among different exchange-traded funds to create a complete portfolio for an investor, based on their self-reported investment objectives and risk tolerance. What would normally take thousands of dollars to accomplish, via individual stocks or funds, can be bought in a single purchase, oftentimes for less than $1,000. Robo-advised portfolios are rebalanced automatically or on demand and can give beginning investors a taste of the risk and reward available in the markets.

With $5,000 to invest, your options open up a bit. You can take better advantage of various retirement plans, for example, and you can gain access to some mutual funds that may have minimum purchase requirements in excess of $1,000. You can also still take advantage of some of the suggestions for $1,000 investors.

An index fund, as the name implies, attempts to track the performance of a designated market index. One of the most popular market indexes is the S&P 500 index, which consists of the 500 largest companies in the U.S. market. No less than famed investor Warren Buffett, the CEO of Berkshire Hathaway and dubbed the “Oracle of Omaha,” has said, “A low-cost index fund is the most sensible equity investment for the great majority of investors.” One of the most popular S&P 500 index funds, the Vanguard 500 Index Fund Admiral Shares, has a $3,000 minimum, putting it out of the reach of a $1,000 investor but available to a $5,000 investor.

Although investors with any amount to contribute may be eligible for a 401(k) or an IRA, those with at least $5,000 can start maximizing the tax benefits of these accounts. The 2021 contribution limit for an IRA, for example, is $6,000, or $7,000 if you’re age 50 or older. As you may be eligible for a tax deduction on your IRA contribution, it pays to max out your IRA whenever possible. With $5,000 to invest, you can get close to the limit for 2021. Although maximum contribution limits for a 401(k) are higher — $19,500 — employer matching contributions are typically less, usually at about 3% to 6% of your compensation. With a $5,000 contribution, you’re likely to take advantage of your full employer match, unless you earn in excess of about $83,000 ($83,000 x 6% employer match = about $5,000).

If you’ve got $25,000 available for savings and investing, you’ll have access to almost any type of investment. With $25,000, you can diversify your portfolio quite well, thanks to the wide variety of low-cost investment options now available. In fact, with $25,000 to invest, you’ll likely want to spread your money around to a variety of investments, rather than putting it all into one. Here are some of the types of investments that are more accessible to a $25,000 investor than to those with less in the bank.

If you want to buy whole shares of individual stocks instead of fractional shares, you’ll likely need tens of thousands of dollars to properly diversify. The $25,000 investment level is just about where you can start feeling comfortable owning a wide variety of stocks while still buying full shares. Unless you’re buying Class A shares of Berkshire Hathaway, which trade at about $431,000 per share, you can likely buy at least eight to 10 stocks that you like. Even if you buy a share of Amazon at about $3,200 per share, you’ll still have plenty left over to pick up shares in names like Netflix, Alphabet, IBM, Tesla, Johnson & Johnson and others. Just remember to use a no-commission broker, particularly if you’re buying small amounts of any single stock.

Although trading apps like Robinhood are popular with small investors, they’re more appropriate for investors with at least $25,000 if you’re looking to day trade. This is because according to the stock market regulator the Financial Industry Regulatory Authority, a pattern day trader must maintain a minimum $25,000 in equity in order to continue day trading. Essentially, FINRA defines a “pattern day trader” as a customer who day trades four times in a five-day period. So, while apps like Robinhood and Webull allow commission-free trading, if you’re looking to be a serious, pattern day trader, you’ll need all of your $25,000 to be allowed to continue trading.

Exchange-traded funds are available to any investor, particularly with the proliferation of zero-commission brokers that made trading costs negligible. However, the problem with smaller investors buying ETFs is that many of these funds track a single sector. For example, the iShares Nasdaq Biotechnology ETF, symbol IBB, is a core holding for many investors but it’s not diversified, with all of its investments related to the biotechnology sector. Even the popular SPDR® S&P 500® ETF Trust, symbol SPY, tracks only U.S. large-cap companies, leaving investors with no exposure to small- or mid-cap stocks, bonds or international equities. With a $25,000 investment, however, you can afford to buy significant positions in a number of different types of ETFs, thereby keeping your portfolio properly diversified.

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