Friday, March 6, 2009

How to start investing with a small amount of money?

If you have a small amount of money and want to start investing then there are a few things that you need to know. Do not jump in and start buying.

What do you need to know?

1. Most brokerage firm require that you open an account and deposit a certain sum of money in it. You will have to make some research about what that minimum amount is. Most brokerage firm would not have a very high minimum amount but if you have a very small amount then perhaps you will have to wait until you have the required amount or make some more research until you find that broker that will allow you to open an account. I would advise against using any broker. The brokerage firm will need to have a reputation and be a secure company.

2. After you have open your brokerage account, you will have to choose the type of account. You have two types of accounts.

(a) The discount account. A simple account where you do all the research and then phone the broker and give him the instructions. He would not give you any advise but simply follow your instruction and send you the share certificate later. You will have to pay a fee for each transaction. This fee can vary from firm to firm. So you will have to make some research on that as well. Because with time fees can reduce your overall return.

(b)Full-service account. This account allow the broker to advise you on the stock market. But the fees are high and as a result it would not be possible for you to have a full-service broker.

(c) The online brokerage account. This broker allow you to trade online. However you will be faced with many restrictions and high fees.

So what investment are available to you?

1. Over the counter shares. Some companies allow you to buy shares directly from them over the counter or by mail. But i think that it difficult and time consuming. However in doing this you will not be paying fees to the broker.

2. Government bonds. These can be bought directly from the government and by using the broker. However if you buy it yourself you will not pay any fee.

3. Shares. You can buy shares yourself and built your portfolio. But you will see that if you buy shares each transaction will incur a fee and if you trade ten times then you might pay a lot of money. So the best way to invest if you have a small amount of money is through mutual funds. You will pay a small fee initially but the fees will not be as much as if you were buying the share yourself. Later on when you will have more money and more experience you will be able to buy shares yourself. Have a look at my post on index fund here.

So good luck.

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