Index funds are a great way for a new investor to get access to the broad stock market. One of the most popular indexes, the S&P 500, contains some of the largest and most well-known companies in the world, from Microsoft and Apple to Facebook and Tesla. With one small investment, you can participate in the growth of America’s finest companies without having to make buy and sell decisions on individual stocks.
Many stocks trade for more than $500 per share. However, at many brokerage firms, this is no longer an obstacle for a smaller investor. Thanks to the introduction of fractional share purchases, investors can now buy specific dollar amounts of stock, rather than having to buy individual shares. Amazon, for example, is one of the most popular stocks in America, but its share price as of Jan. 21 is north of $2,800 per share. In years past, this would prevent a small investor from buying Amazon stock, but now many brokerages will allow it.
With $500 to invest, you could now own about 0.17 shares of Amazon. Even better, with $500 you could actually build a diverse portfolio at some brokerages. For example, you could buy $100 worth of five different stocks or even $50 each of 10 different stocks. Just be sure to use a no-commission broker, otherwise, your fees will eat up a good portion of your initial investment.
For example, depending on your investment goals and risk tolerance, you might want to own international stocks, small-cap companies or stocks that pay high dividends. Unlike an index fund, which is generally static, mutual fund managers dynamically buy and sell shares of companies based on their earnings prospects and business fundamentals. In times of market uncertainty, managers also have the freedom to become more defensive. For some investors, this is a better bet than simply owning an index.