Buying stock can be intimidating, especially on a modest budget. The movies show people buying positions with thousands of shares. And the media highlights household-name companies trading at hundreds or thousands per share.
But this doesn’t mean you have to wait until you have thousands of dollars to invest. Small stock buys can move you further down the path toward your financial goals, sometimes more swiftly than risking it all on a few shares of a major corporation.
10 Ways Small Stock Purchases Make You Money
1. You Can Invest Spare Change
One barrier to investing or saving of any kind is not having substantial money at the end of a pay period. It doesn’t seem like enough to bother with when you have just $5 or $10 left. It’s also far too little to buy many of the most valuable stocks.
Small stocks are different. You can’t buy a share with literal spare change found under your couch cushion, but you can purchase holdings with small amounts of money put aside or left over. It lets you begin investing and putting your money to work earlier and more often than if you wait for larger, more highly valued stocks.
2. You Can Take a More Diversified Position
Portfolios can be diversified or concentrated. A concentrated portfolio puts most funds into just a few stocks. These stand to win big if they do well, but they also stand to lose big if they do poorly. A diversified portfolio is safer because other funds will perform well enough to absorb the loss.
If you buy small stocks, you can diversify more easily. It’s simple math. One hundred dollars invested in stocks trading in the $40 to $60 range means you can only buy a few stocks. Investing the same money in small stocks means you can buy a wider variety.
3. Found Money Becomes a Profitable Investment
Found money is money you didn’t expect, forgot you had, or otherwise received outside your standard income streams. Overtime pay you don’t usually get, cash from a garage sale, and a $20 bill you find in your jacket are all examples of found money.
Very often, found money goes toward frivolous expenditures. It’s not part of your budget, so it feels harmless to have fun with it. But use it for small stock purchases, and those tiny bonuses create extra wealth.
4. You See a Greater Growth Percentage
Real estate and savings tend to appreciate at an amount scaled to their original value. This is not the case with stocks.
A $10 stock and a $100 stock increase according to the market, so a $1 gain in a day is a 10% growth for the small stock and a 1% growth for the larger stock. This isn’t the only number you need to watch when considering the performance of your stock purchases, but it can be crucial.
Just be warned: the reverse is true as well. From a $1 loss, that smaller stock retains only 90% of its value, while the larger one retains 99%.
5. You Can Purchase Partial Shares
Making small stock purchases doesn’t limit you to buying low-valued stock. Fractional shares allow you to buy a portion of a single stock share. This is a common strategy and works two ways.
The first is to buy fractional shares of a given stock. Certain brokerages and apps will set you up to buy a share of a share.
The second is to invest in a mutual fund, where the pooled money of all members buys several stocks. You can put in as little as you need and get a fractional share of every stock held by the fund.
6. It Creates an Investing Habit
Our lives are the total of our habits, and if we’re not in the habit of investing, it’s hard for us to get ahead with our finances. Many people never develop that habit because they don’t have the money to invest regularly.
By investing in small stocks, you can start to build that habit. Even $10 a month makes a difference when you invest it every month. As that habit takes hold, it creates wealth that allows you to invest more, making the results even more powerful.
7. You Can Automate Contributions
Automated contributions to savings and investment accounts make it easier to invest. You don’t have to remember to contribute each pay period, and it’s easy to get accustomed to its impact on your budget. For many families, though, automatically withdrawing several hundred dollars to buy stocks isn’t reasonable for their monthly cash flow.
Small stock purchases can allow you to contribute automatically without straining your bank balance. Significant automatic contributions would be better, but small and consistent contributions beat large contributions that only occur once in a while.
8. There’s a Higher Potential Growth
Blue-chip stocks generate reliable growth but don’t earn massive dividends. They come from large, stable companies that make large, steady movements. They’re for people who value security over potential gain.
Smaller stocks usually belong to small, new, agile companies. These have the potential for rapid growth as they reach the next life cycle stage. Not all of them will explode with growth, but if 1 in 10 grows at 10 times the average rate of the larger stocks, you’re still ahead of the game.
9. There’s Less Competition from Institutional Investors
Institutional investors play a prominent role in stock markets. They make massive purchases and manipulate prices. They shore up share prices to compete and keep out casual investors.
They also stick with the more extensive stocks of companies with track records. It’s more reliable for them and requires less administrative expense. So if you trade in small stocks, you largely avoid their interference.
10. You Have a More Stable Portfolio
Imagine you have $1,000 in stocks, holding 10 shares’ worth $100 each in five different companies. If one of those companies has a rough quarter, it destabilizes 20% of your investments.
If you bought shares at $20 each, you could invest in 50 different companies. The fate of any given stock would have a much smaller impact on your portfolio, making your investments safer overall.
One last way small stock purchases can help your financial future is that you get to start sooner. If you don’t get into stock trading until you can afford a four- or five-figure contribution, it might be years until you put your money to work for you.
With small, incremental investments, you can start this month. As the stocks grow in value, you can use that extra money to buy more stocks until you’re ready to amass significant positions.
Allie Parkerson worked at a wirehouse for a decade and is now an independent financial consultant.