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Sam Island for Money

Investing in the stock market is one of the surest ways to build wealth in the long run. While it requires some legwork to understand your options, you can get started with just a few dollars.

In fact, largely thanks to new innovations like stock-trading apps and robo-advisors, buying stocks, bonds and other assets is easier than ever. And getting started early can make a big difference, giving more time to let the magic compound interest — investors’ biggest advantage — work in your favor.

Ready to get started? Here’s a primer on the best ways to invest with less than $1,000.

How to get started with mutual funds

The simplest way to get started investing is through a mutual fund. Almost a century old, these vehicles, designed to help small investors pool their money, are overseen by fund managers who go into the market to buy stocks, bonds or other assets and hold them for you, passing along the dividends or interest when it comes to bonds.

Mutual funds come in two basic flavors: Those that aim to deliver market returns (i.e. they aim to gain 1% when the stock market gains 1%) and those that aim to beat market returns. While outperforming the market obviously sounds appealing, it’s worth keeping in mind the majority of the funds that attempt this fail. That’s in large part because of the higher fees they charge to pay star portfolio managers and sometimes teams of analysts to research stocks.

Last year just over two-thirds of U.S. large-cap stock mutual funds lagged the S&P Composite 1500, according to S&P Global’s semiannual scorecard. (Figures are trailing 12 months though June 30.) Unfortunately such subpar results are par for the course, in up and down markets.

You can buy mutual fund shares either at a brokerage firm like Schwab or Merrill Lynch, or often directly from the fund company itself. Major fund firms include the Vanguard Group, Fidelity Investments and BlackRock.

While individual stocks trade throughout the day, mutual funds typically allow investors to buy or sell fund shares once a day, at the market’s 4 p.m. closing price. However, their cousins exchange-traded funds can be traded throughout the day just like an individual stock. It’s worth nothing that while some ETFs are actively managed, most track indexes.

While some mutual funds have investment minimums, it’s possible to find funds with small or no minimums at all, including the Fidelity “ZERO” family of funds or the Schwab S&P 500 Fund.

How to get started with a 401(k)

Another classic route into the stock market runs through your employer. You may even have been automatically enrolled. Retirement plans like these are a great way to save — although remember you can’t take out the money until your retire.

A key advantage of a 401(k) is the employer match, a saving incentive, where your employer agrees to match whatever share of your salary to divert from your paycheck to your retirement account up to a certain percentage, typically 3% to 6%. Most financial experts say you should contribute at least enough to your 401(k) to get the full match, otherwise you are passing up free money.

Saving in a 401(k) also has tax advantages. The IRS allows you to contribute up to nearly $20,000 a year tax free, although you are taxed, at regular income-tax rates, when you withdraw the money, which you can do starting at age 59 ½. While some mutual funds allow you to trade stocks, most offer you a menu of mutual funds. If you don’t pick a fund, chances are your money will automatically be put into a target-date fund, which should hold an age-appropriate mix of stocks and bonds.

How to get started with a robo-advisor

If you are looking for a little extra help, a robo-advisor might be right your you. These are basically apps designed to mimic the experience of working with a financial advisor.

Providers such as Wealthfront and Betterment work like human financial advisers, algorithmically processing information on your age, risk tolerance and retirement goals to funnel you into suitable investments.

Both Betterment and Wealthfront charge 0.25% per annum — about $2.50 based on a $1,000 account — for managing your money. Typically, the robo-advisor will divvy your money up between a range of index funds and ETFs, which can carry small additional fees. Your portfolio will be automatically rebalanced as changes in market value knock the proportion of stocks and bonds out of whack.

How to buy stocks

Of course, plenty of investors want to pick their own stocks without relying on a mutual fund manager or robo-adviser to do it for them. And new technology has made this a lot cheaper and easier in the past few years, as apps like Robinhood pioneered zero-commission trades and the ability to buy fractional shares, meaning no amount is too small to invest in the stock market.

The advantage of buying single stocks is obvious: You have more control over what businesses you are supporting, allowing you to express your values or capitalize on your expertise. The danger is that you put too many eggs in a single basket.

It’s possible to see big losses on a narrow portfolio of single stocks even when the broad market is booming. And it’s hard to build a single-stock portfolio as diversified as, say, an ETF that invests in the 2000 stocks in the Russell 2000, even with fractional shares. Bear this in mind if you choose a single-stock portfolio. Aim to have at least 10, spread over at least 5 of the 11 Standard & Poor’s 500 sectors, which range from energy to health care to technology.

To start buying single stocks, it’s a matter of minutes to download an investing app like Robinhood or Social Finance on your phone or to set up an online account with a more traditional broker like Fidelity or Schwab. Once you’ve given them a few key pieces of information such as your social security number and whether you work in the securities industry, you can usually link the app or online account to a bank account by inputting your bank information in a portal.

All of these apps are designed with user-friendliness in mind. Simply input the name of the company whose stock you want to purchase. A calculator function will help you figure out how many shares you can afford to buy. The type of order is important: a "limit" buy order will buy a certain stock at a set price; a "market" buy order will buy it at whatever price it's on offer at the moment you place the order; sell orders can be placed with similar criteria manually, or you can set up an automatic sell order if the stock hits a target (or loses a certain amount of value).

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