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 have a lump sum of at least $10,000, you have a lot of great investment options.
Before you start exploring these options, however, you’ll want to make sure you don’t have any outstanding high-interest debt such as credit cards that need to be paid off. And you should make sure you have an emergency fund put away in a savings account.
Matt Farrington, a financial advisor at Merrill Lynch, said, “It’s a good idea to keep at least three months of income in a separate, easily accessible account. If your job has fluctuating income, it might be a good idea to stretch it from six months all way up to a year depending on how comfortable you are and how much risk you’re willing to take on.” Once these tasks are in order, here are the best investment choices for your $10,000.
1. Mutual Funds
One of the best ways to start your investment portfolio is by utilizing mutual funds. Many mutual funds have initial investment requirements of $2,500 or less, making them an ideal starting place for beginning investors. They’re also familiar to many people through their IRAs or 401k plans. With hundreds of different mutual funds available, you can narrow down your options by using online fund screeners to choose the right one to fit your investment risk objectives and goals.
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. The advantage of using mutual funds is that you get professional management for a small fee and get instant diversification along with it.
For long-term investors, this approach allows you to use the classic “buy-and-hold” strategy since mutual fund managers will take care of the stock selection. You also have the ability to invest into these types of funds on a regular monthly basis and in many cases, for as little as $50 a month, helping you maintain an active investment philosophy.
2. Exchange-Traded Funds
For investors that 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 actively managed, 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. You’re able to buy and sell quickly, as opposed to mutual funds, which trade just once a day.
ETFs hold a selection of stocks like mutual funds but aren’t quite as diverse. A mutual fund may hold a group of stocks that encompass many different sizes and sectors. ETFs are far more specific. In order to build a diverse portfolio and reduce your risk exposure, you’ll need to hold at least five different ETFs.
If you’ve managed to save up $10,000 to invest with, you might try your hand at buying individual stocks. Many brokerages such as E*TRADE, Scottrade and Merrill Edge allow you to open an account and begin trading stocks for around $5 to $10 per trade. 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 you to do a lot of due diligence and research opportunities on your own, so it’s not ideal for most beginning investors. However, if you have the time to manage your own investments, individual stocks offer many benefits that ETFs and mutual funds don’t. Owning a stock doesn’t require management fees, which lets you keep more of your money to invest. You’ll want to stay diversified to mitigate risk, and that means holding a portfolio of at least five to ten different stocks.
You’ll also want to keep an eye on your trading frequency. 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 just to break even.
Advanced investors might consider investing in options. These derivative investment products use leverage in order to maximize gains. Options are contracts through which a seller gives a buyer the right, but not the obligation, to buy or sell a specified 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. However unlike stocks, 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.
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.
If you have $10,000, you could try your hand at issuing loans to customers through P2P platforms such as The Lending Club, 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.