You can absolutely invest $50 in the stock market. You can either find a stock or set of stocks that you can buy for under $50, or you can invest the money into a fund that invests in the stock market. Make sure to watch out for commissions or other fees that can eat into your earnings, and watch for scams that are sometimes associated with low-valued stocks.
How the Stock Market Works
The stock market allows you to purchase shares in particular companies, each representing ownership of a small piece of the company. Each company's shares trade for a particular, usually shifting, price. Investors typically try to buy shares in companies that they expect will do well in the future, causing their share prices to rise, so that they can make a profit when they sell the shares later on.
Owning shares of stock also entitles investors to receive dividends if the company pays them out. Dividends are a way for a company to share its profit with its stock owners, or shareholders, by paying them a chosen amount of money or an additional amount of stock in proportion to how many shares they own. Owning stock also often entitles you to vote on certain corporate decisions and attend regular shareholder meetings.
To buy and sell stock, you typically work with a brokerage firm, which will essentially process the purchase, hold the stock for you and help you receive dividends and notice when it's time to vote on any shareholder decisions. Most brokerages now have online websites and apps that allow you to buy and sell stock from your computer or smartphone. Stock is typically listed with the company name and what's called a ticker symbol that uniquely identifies the stock. If you're searching for a company by symbol, make sure to double-check that you have the right one so you don't accidentally buy or sell the wrong company's stock.
While it's possible to make good money in the stock market, remember that you can lose some or all of your investment. Make sure not to invest more money than you can afford to lose and consider balancing riskier investments with less risky ones to meet your financial needs.
How to Pick a Stock
Whether you're looking to invest $50 or $50,000 in the stock market, you'll want to do some research to find stocks that are right for you. Most publicly traded companies, meaning those where anyone can buy and sell their stock, are required to file regular reports with the Securities and Exchange Commission. Those are available online at the SEC's website, through many brokerage sites and often through the companies' investor relations websites. They can be a good place to start to understand how a company is doing financially.
You'll also want to take a look at analyst reports, which will often compare the companies to others in similar areas of business. You can also do some of this yourself by comparing the figures in a company's earnings reports with those of its competitors. Also scour the news media for mention of the company, such as any recent controversy or high-profile product launches, deals, legal issues or other relevant information.
You can use various online investment calculator tools to compute various statistics about the company, such as its price-to-earnings ratio or its debt-to-equity ratio. Research which of these types of statistics might be relevant to your investment.
Dealing with Brokerage Trading Commissions
Keep in mind that when you buy and sell stock, you will often be charged a fee called a trading commission by your brokerage. If you're trading a relatively small amount of stock, these commissions can potentially significantly reduce your earning potential, so make sure to take them into account when you're making your investment decisions.
Some brokerages don't charge commissions or only charge them in particular situations. Others vary in how much they charge in commission for different types of transactions. Some also charge fees for other services that may or may not be useful to you, like access to particular types of data or reports.
Shop around for a brokerage offering the services you want at a fee structure that makes sense for your investment goals. Keep in mind that you can always open accounts at different brokerages if your needs change and that you can often even transfer existing stocks from one brokerage to another if you're dissatisfied with the level of service or the prices you're paying.
Buying Directly from a Company
Certain companies offer direct stock purchase plans where you can buy stock directly from them without going through a traditional brokerage. The fees and even cost of the stock may be different from going through a broker, so it's a good idea to compare to see which option makes more sense for your needs. Many of these plans also offer to let you automatically reinvest your dividends in additional shares of the stock, although brokers often have similar options available.
Many companies also offer plans where employees can easily invest in company stock. Some offer stock options that give the right to employees to buy stock at discounted rates after they've been with the company a certain length of time, and some offer other ways for employees to invest in the company, such as through an employee stock ownership plan. In some cases, employees may even get stock grants, where part of their compensation is in the form of company stock. Talk to your employer to see if such a plan is available to you.
The Market for Penny Stocks
If you're only investing $50 in the stock market, some of the stocks you're considering may be what are known as penny stocks. Typically, a penny stock is one that's valued at $5 or less per share. While there can be small investments that make money to be found in this sector of the market, there is also a fair amount of risk. Some penny stocks are older companies that are past their prime, and some are newer startups that may not yet have seen a profit.
Some penny stocks are also over-the-counter stocks, which means that they're traded through networks of brokers rather than through the big exchanges like the New York Stock Exchange or Nasdaq exchange. You can buy and sell these stocks as any others through your broker, but it can take longer to buy and sell them since the market is smaller, and you may see price fluctuations while your orders are going through.
Beware of Pump-and-Dump Scams
Another issue with penny stocks is that they're sometimes manipulated by fraudsters in what are called pump-and-dump scams. In this case, someone unscrupulous will buy a number of shares in a penny stock and then promote the stock through newsletters, internet forum posts or other venues without revealing any connection to the stock. Then, when other investors read the posts and buy into the stock, the fraudster will sell the stock at a profit. Since there was no legitimate basis for the stock to rise in price, the later buyers will usually end up having to sell at a loss.
Avoid these scams by only taking investment advice from trusted sources, like reputable analysts or financial advisors. Be wary if someone tells you that you can invest $100 and make $1,000 a day or something similarly too good to be true.
Buying Fractional Shares of Stock
If you only want to invest a small amount of money, you may find that some companies you like are simply too expensive per share to buy even one unit of stock. A way around this problem is to buy fractional shares of the company stock through a brokerage that allows it.
A fractional share is normally handled for you by the brokerage, which will actually hold full shares of the company and essentially allocate its value over multiple customers who each own a portion of it. You are often entitled to your portion of the dividends the share earns as well.
Different brokers have different fees and rules for investing in fractional shares. Make sure you understand the possibilities and the ins-and-outs involved, just as you should for any other investment.
Investing in Stock Funds
Rather than directly purchase stock, you can invest your money in a fund that pools investor money to invest in the stock market. Some of these are traditional mutual funds, which generally hire investment experts to decide what to do with client money. You can find their performance online in various financial publications.
Others are what are known as index funds, which put money into the stocks in particular market indexes, like the S&P 500 or the Nasdaq Composite index. They often charge lower fees than traditional mutual funds, since they don't have to pay experts to pick stocks. They can be a good way to invest in the market as a whole or, for funds that cover particular sectors, an area of the economy like finance or manufacturing.
Some funds are what are known as exchange-traded funds, meaning that you can buy shares in them through a brokerage using a ticker symbol, the same way as you would buy actual stock.
Certain funds do have minimum investments, but some allow you to invest as little or as much as you wish. Some brokerages also sell fractional shares in exchange-traded funds. Make sure you understand the funds you're considering, the types of investments they make and the fees involved.
Understanding Tax Issues Around Stocks
Even if you're only investing a small amount, you should make sure you understand the tax issues around investing in the stock market. Typically, you will owe tax if you sell a stock for a profit compared to the price you bought it at. You are allowed to subtract commissions you paid to buy and sell the stock from your earnings.
If you held on to a stock for a year or longer, you can pay tax at the long-term capital gains rate. This rate is either 0 percent, 15 percent or 20 percent depending on your overall income, and most taxpayers will pay 15 percent. It's usually lower than the ordinary income rate that you pay on other income, such as from work or earning interest in a bank account. If you held on to a stock for less than a year, you must pay tax at the ordinary income rate.
If you sell a stock at a loss or hold on to it until it becomes worthless, you can claim a capital loss on your taxes. Capital losses can offset capital gains or up to $3,000 in ordinary income. You can roll unused capital losses forward in time, but you can't roll them back to earlier tax years. You may want to time when you sell various stocks to properly pair your losses and gains.
- NerdWallet: Understanding Investment Fees: From Brokerage Fees to Sales Loads
- Direct Stock Purchase Plans: a Viable Alternative to Online Brokerages? - ValuePenguin
- National Center for Employee Ownership: How an Employee Stock Ownership Plan (ESOP) Works
- The College Investor: Where to Buy Fractional Shares to Invest
- US News: Penny Stocks: 5 Ways to Spot a Pump-and-Dump Scam
- IRS: Topic No. 409 Capital Gains and Losses
- The Motley Fool: Index Funds vs. Mutual Funds
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.