Stock Buying on a Budget – Got $1? You are in Business
Do you own stocks? If so, congratulations, you are one of the 55% of Americans who own some sort of stock (according to the recent 2020 Gallop poll). Depending on what is going on in the world at the moment, you may not think much of that congratulatory message, especially if your stock value is down, nonetheless you are a part of the exclusive stock ownership club. That statistic includes people who own individual stocks or have mutual funds or ETF’s (exchange traded funds) in a retirement account.
Now for the 45% of you that answered no, another question, why not? Maybe your answer lies with a few of these common reasons for not owning stock: I don’t make enough money, I know nothing about stocks, everything goes towards bills, too hard to figure out, I can’t risk losing money, etc.
We are going to briefly review a couple of popular platforms where you can buy fractional shares of stocks or ETFs for $5 or less.
Full disclosure, we have no affiliation with any company here and are not compensated in any way. We simply have found a good degree of personal success from them and believe they make investing simple for the average person who may have had one of those common reasons for not owning stocks.
We will also take the view of a millennial who wants to dip their toes into stock buying with small dollar amounts, a $5 here and $5 there approach. If you don’t have a retirement account with your employer or individually yet, we encourage you to do so but for our purposes today we are just going to look at an regular personal investment account.
Before we dive in too deeply, a couple of rules that nearly every new investor breaks…..including us. Avoid these mistakes!
Rule #1
Don’t invest money you can’t afford to lose. Seems simple but try this scenario.
You are excited to buy stock so you jump right in and but $500 worth of an ETF. It is has been down a bit in value but otherwise life is great. Then the head gasket on your car goes out. You are faced with a $2,000 repair bill or you have to buy a new car. You have no money in savings so guess where that money comes from? You sell your stock and lose money on the transaction and now you are back to square 1. Before buying any stock, your first step should be to set up an emergency savings account for those situations. Start with $500, then $1,000 and upward.
The US stock market has averaged great returns over time and outside of real estate and home ownership is a one of the best ways to build wealth but the key is…….over time. if you are cashing out your account for every “emergency”, you’ll never accumulate anything. Go in with the thought process of “nothing comes out of this account for at least 10 years”.
Rule #2
Know that there is a possibility that you could lose all of that money, in other words you have to be comfortable with risk. Nothing in life is a sure thing and stocks are not immune to that either.
Alright, so you have an emergency fund with at least $500 in it, your goal is not to cash out the account or sell anything to pay bills, and you understand you can lose what you put in. Great! Let’s go.
One of the best investing apps I have come across for beginners is Stash. It makes buying stocks incredibly easy, fun, and has a great bank of information in the app to help all types of beginners navigate the murky and complex world of stocks.
We already mentioned that a lot of people shy away from investing because they don’t think they know enough. With this app even your grandma can successfully buy stocks (No offense to grandma’s….we love you all)
Pros:
The ultimate beginner’s app. If you have no experience whatsoever this one is for you. Download the app create an individual account and put $5 in an ETF with a catchy name like “Match the Market (IVV) or Long Term Mix (AOA)”. It is that easy.
You can “auto-stash” and have it set up to automatically put a certain amount daily or weekly into the stock or ETF of your choice or simply add to it when you have an extra couple of bucks available. If you are a true beginner we recommend just putting money regularly into one of these ETFs to get your feet wet. They do have individual stocks you can buy in fractional form with as little as $1 but the risk of loss is much higher with individual companies. By buying in fractional format over time, you will be also taking advantage of “dollar cost averaging” a magical investment phenomenon that will help you maximize profits.
They also have options for a Roth IRA retirement account and custodial account for your kids under 18; both come with increased monthly fees $3-$9 total depending on how many types of accounts you choose to have.
$5 referral reward for each person that creates an account that you send over. You get $5 and they also get $5. Fairly small potatoes but you can earn up to $250 in a year this way. Something to keep in mind if you have interested friends.
A very seamless integration with your bank. Money transfers to the app are timely and trades operate smoothly.
There is also a great Facebook group/community of all types of Stash investors; definitely a benefit and additional resource.
Cons:
Individual accounts cost $1 a month. In my opinion a fairly reasonable fee given the flexibility and functionality, however, if you have a small amount of money in that account, it can be unreasonably high. For instance, if you only invest $100 that first year, you would pay $12 for the account or 12% which is certainly not good by anyone’s estimation. The good news is that that $1 number doesn’t change as your balance goes up and I have been able to easily make that $12 fee per year in dividends from the stocks I own. You also get $5 for each referral so you can mitigate that cost in this manner as well.
Stash also isn’t the perfect place to invest large amounts of money. You certainly can do this and people do but this app is great for throwing $5 bucks here, $10 bucks here, and so forth. If you have a large amount of money to invest, I would still use the Charles Schwabs, Etrades, and Vanguards of the world. Those companies as of this writing do not have fractional share capabilities, which is one of Stash’s biggest benefits, but I suspect that they will soon.
Stash also uses several trading windows a day, meaning your order is a “market order”, which in English translates to: you can’t control the exact price you buy the stock at. This is less of an issue for a beginner who is buying the same stock repeatedly over time but if you are trying to perfectly time share prices and buy at exact prices, this isn’t the app for you. With other apps and platforms you are able to use limit orders to choose at what price you want to buy or sell at but this is not an option with Stash.
Stash also will push you some of their other products and affiliate companies products. They have a checking account which I’ve found doesn’t make too much sense and they also send you lots of information on life insurance. Great if you need it, potentially annoying if you don’t.
Overall, a great app for those with all experience levels, especially beginners. I have used Stash over the last 3 years. When I had an extra $5-10 laying around in my bank account, I would just throw it in the “Match the Market (IVV)” ETF and I was truly surprised at how quickly it added up. I would have most likely wasted that invested money on something else.
Another great investment app that I use is Robinhood. This is more for the intermediate to advanced investor but it is certainly accessible and friendly to beginners albeit not as friendly as Stash. If you have no experience whatsoever, you can start with Stash and then move to Robinhood once you get the hang of it. Or if you have stock experience, you can use both actively like I do. Each has their benefits.
Pros:
There are no monthly fees like Stash. This is what I like most about this app. They also just recently added fractional shares to their repertoire, meaning you can have some of the same functionality as Stash as far as throwing $5 here or $10 there towards a, let’s say, $300 Apple stock.
You can also place limit orders and control to a large extent the price you buy a stock at and sell a stock at, which at Stash, is currently not possible. The catch: You can utilize this option only when you buy full shares of stocks. If you buy fractional shares of stock, then you are essentially placing a market order just like Stash.
You can also buy crypto-currencies on here. In our opinion, this is a negative thing for beginners, but I am listing it as both a pro and a con depending on your angle. Please no angry bitcoin emails.
Also a very seamless integration with your bank. You can transfer money and use it to trade immediately. If your Robinhood account doesn’t have the funds to buy the stock, it will prompt you to make a deposit for that amount from your bank. Once you do that, it connects you to the purchase of the stock part and you finalize your order, which is extremely user-friendly. There is no going back and forth; no need to transfer money in one area and then go back to a different order screen. All of those are connected in one big step which is great. Any transfers from your bank will show up in your account that same day or the following business day making it easier to keep on top of.
Robinhood also has a referral bonus, which is substantially better than Stash. When you refer someone and they sign up for an account, you each get a free share of stock. They make it a game and give you a few mystery doors to choose from. You pick one of them and a stock is revealed. Most of these stocks are random companies trading in the $5-10 range but I have had friends receive Microsoft and Apple stock for free because of this. The accrual limit is also higher. You can earn up to $500 in stock this way.
Cons:
There is still a bit of a Facebook community around Robinhood but it is more centered on day trading penny stocks and of little use to the average beginner. In fact, it can easily lose you a lot of money trying to follow all of these people’s tips. Now this is a bit of an unfair “con” since the Facebook page is unaffiliated with the company but we let the con stand since from an educational standpoint there are significantly less resources to help beginners navigate the world of stocks on this app.
You can buy cryptocurrencies. In our view, as a beginner you should stay as far away from these as you can. There is no equity backing them (you don’t own anything like you do in stock) and they are extremely volatile. You have similar odds gambling with that same money in Las Vegas but hey it’s your money.
Robinhood also allows option/margin trading. Great if you know what you are doing, potentially devastating if you do not as this tragic story illustrates. We encourage you to invest only in what you understand and if you are a beginner to leave options alone.
They also do not allow you to have a beneficiary for your account yet. Stash does allow this.
App trading in general is still a fairly new endeavor and bugs have appeared. Robinhood allegedly forgot to update their app code for February 29th of this year (a leap year), so trading for everyone was not possible on this day because their app didn’t recognize it as a real day, an unbelievably large mistake. (The company denies this rationale but there were extended outages nonetheless regardless of reasoning)
Robinhood will also try to push additional products at times. There was an ill-fated checking account attempt last year and you’ll come across a few other promotions. Just stick with the basic individual stock trading account here and start buying stocks!
Overall, a very useful app for every type of investor. We love the no fees aspect and the recent addition of fractional shares. Education and resources are light with this app which scares away some beginners.
There are certainly more apps out there you can use that make investing simple. These are two of the most popular and ones that we have personally had success with. We encourage you to join that 55% of Americans who own stocks but please do so keeping in mind where most people go wrong.
Don’t invest with money that you need to use now, don’t invest in things that make you uncomfortable/that you don’t understand, don’t invest for the short-term (shoot for 10 years+), understand there are no sure things, and if you are a beginner start with ETFs not individual stocks. Here are a few great ETFs you can start with (Ticker symbols: IVV, SPY, AOA, AOR, VTI, VIG). These funds are all from great companies and are diversified. You can still lose money but you can also make your future a bit brighter by simply beginning the journey. Are you in?