There’s a common saying that it takes money to make money, but you might be surprised at how little money you actually need to get started. If you’re looking for the best way to invest $10,000, you have a lot of great investment options.
Some of the main problems with a small starting investment include high relative commissions and the inability to diversify. However, the investment options below offer some ways to overcome both of these obstacles.
Learn More: Smart Investment Options for Less Than $500
1. Investing in Mutual Funds
- Best for: Investors seeking diversification in one package
- Expected returns: For stock funds, market-type returns — about 8-10 percent on a long-term average basis
- Length of time to invest: Long-term, ideally five years or more
A mutual fund is usually an actively managed investment fund with a dedicated research team that allocates funds to select investments that align with the fund’s stated investment objective. There are literally thousands of mutual funds to choose from, so it’s likely you can find a fund that matches your exact investment objectives.
Many mutual funds have initial investment requirements of $1,000 or less, making them an ideal starting place for beginning investors. They’re also familiar to many people through their IRAs or 401k plans. Although some mutual funds charge commissions known as sales loads, many others charge no fees at all to buy or sell. All funds, however, have ongoing management fees.
Pros of mutual funds: You get professional management for a small fee, along with instant diversification.
Cons of mutual funds: You’ll pay ongoing annual expenses and have a lack of direct control over your investments.
2. Investing in Exchange-Traded Funds
- Best for: Investors seeking diversification in a stock-like package, or those focusing on particular market sectors
- Expected returns: Reflective of underlying portfolios; for stock funds, market-type returns — about 8-10 percent on a long-term average basis
- Length of time to invest: Can be used for long-term investment, short-term hedging or anything in between
For investors who want more control over stock management but still want diversification, exchange-traded funds (ETFs) are a good choice. Unlike mutual funds, these types of investment products aren’t always actively managed. Oftentimes, they are passively invested into market indices, so they tend to experience higher ranges of volatility as the broader stock averages rise and fall. They work much like stocks in that ETFs can be traded and are highly liquid investments. Use these ETF investing strategies to boost your portfolio.
As stock-like investments, you normally have to pay a commission to buy and sell ETFs. With a limited amount of money to start out, you’re best served finding brokers with the lowest commission rates. Firms such as Fidelity charge just $4.95 per trade as of 2018, while online broker Robinhood charges no commission at all.
Pros of exchange-traded funds: You’re able to buy and sell quickly, as opposed to mutual funds, which trade just once a day.
Cons of exchange-traded funds: ETF investing might not be quite as diverse as a traditional mutual fund investment; you might also have to pay commissions.
Learn More: What Is an ETF?
3. Investing in Stocks
- Best for: Investors seeking high capital returns
- Expected returns: Stocks on average have long-term average returns of around 7 percent; individual stocks can provide greater gains (or losses)
- Length of time to invest: For investors, long-term, ideally five years or more; traders can be in and out much more quickly
If you’ve managed to save up $10,000 to invest with, you might try your hand at buying individual stocks. Many discount brokerages such as E*TRADE, TD Ameritrade and Merrill Edge allow you to open an account and begin trading stocks for around $5 to $10 per trade, or even less. By buying company stock, you become a part owner, giving you access to dividends — if the stock issues them — and even voting rights in the company.
To be sure, investing in stocks requires a lot of due diligence and personal research, so it’s not ideal for most beginning investors. Plus, too many trades can eat away at your gains through fees. If it costs $10 per trade, then just to buy and sell one stock will cost you $20. If you invest $1,000 in one stock, you need to make a gain of 2 percent to break even.
However, if you have the time to manage your own investments, individual stocks offer many benefits that ETFs and mutual funds don’t.
Pros of individual stocks: Owning a stock doesn’t require management fees, which lets you keep more of your money to invest; stocks can also provide outsized gains.
Cons of individual stocks: You’ll need to assemble a portfolio of at least five to ten different stocks if you want some diversification; costs can ramp up rapidly.
4. Investing in Options
- Best for: Speculators, or investors looking to hedge current positions
- Expected returns: Many options expire worthless, but huge profits are possible
- Length of time to invest: Short-term, typically a few weeks to a few months
Advanced investors might consider options trading. These derivative investment products use leverage in order to maximize gains. Options are contracts where the buyer can, but doesn’t have to, buy or sell a number of shares at a predetermined price within a set time period.
If you have $10,000 to invest, basic options strategies can be a great way to maximize your potential gains. Options operate in round lots, so buying one option gives you control of 100 shares of stock. This type of leverage works particularly well if you don’t have a lot of upfront capital to invest, as a small sum can give you access to 100 shares of stock.
Pros of options: With a small investment, options can provide high returns.
Cons of options: Options have time limits on them before they expire, so if a stock doesn’t rise within that time frame, you could lose your entire investment.
The benefits can be worth the risk though and can enable you to make bigger gains at the cost of taking on more risk.
5. Investing in Microloans
- Best for: Investors looking for alternative investments; those seeking to provide financing to underserved communities
- Expected returns: 3 to 8 percent, depending on the riskiness of the loan
- Length of time to invest: Any single loan typically has a term of less than six years
The modern financial world is constantly evolving, and many things that were once solely the realm of banks have become possible for individuals to participate in as well. Peer-to-peer lending (P2P) is becoming more popular, and with credit checks in place, it’s become a much safer investment option than ever before with competitive interest rates.
If you have $10,000, you could try your hand at issuing loans to customers through P2P platforms such as LendingClub, which matches qualified borrowers with investors for loans that start at a few thousand dollars and up. By using these sites as a go-between, you can rest assured knowing that a background and credit check has already been done, and the risk of losing your investment is greatly reduced.
Pros of microloans: Can pay higher interest rates than available elsewhere; can serve a social purpose.
Cons of microloans: Not regulated on an exchange like stocks; still risks of default.
Learn More: What Is a Microloan?
6. Investing in Treasury Bills
- Best for: Conservative investors seeking protection of principal and tax-advantaged interest
- Expected returns: Low returns in exchange for safety
- Length of time to invest: Short-term, 52 weeks or less
Treasury bills are short-term securities backed by the full faith and credit of the U.S. government. Practically speaking, U.S. Treasury securities are considered one of the safest investments available. Regular Treasury bills are sold with maturities of four, 13, 26 or 52 weeks. The interest you earn on Treasury bills is not subject to state or local taxation.
T-bills are good investments for beginners with limited funds due to their safety, liquidity and low cost. You can buy Treasury bills for as little as $100. Bills are issued at a discount, meaning you pay less than the total face value you receive at maturity. For example, you might pay $980 for a T-bill and then receive $1,000 at maturity.
Pros of Treasury Bills: Safety, tax benefits
Cons of Treasury Bills: Low return
Click through to learn about investments that offer low-risk options for your money.
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Daniel Cross contributed to the reporting for this article.