Should You Open a Brokerage Account if You Don't Have Much Money?
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If you want to invest in stocks, exchange-traded funds (ETFs), or many other kinds of assets, you will need a brokerage account. There are many discount brokerage firms online, so you'll have a wide variety of choices.
But if you don't have a lot of money, you may be wondering if opening a brokerage account is worth it. The answer is, it depends whether you have some money you can afford to lose -- and whether you've met certain financial milestones.
Take care of the basics before opening a brokerage account
Investing in ETFs and building a diversified portfolio of stocks, bonds, and mutual funds can provide the opportunity to earn generous returns. And if you're smart about how you invest and you put your money into solid assets for the long-term, the risk of major and permanent losses is minimal.
However, investing inherently carries some risk, so you shouldn't invest money you can't afford to lose. You also typically shouldn't invest any money that you may need in the next two to five years. That's because the stock market goes through cycles, and stock market dips are inevitable. If you invest funds you'll need soon, you stand too great of a chance of having to sell at a loss during an inopportune time.
Because of this, here's what to do before you open a brokerage account:
- Set up an emergency fund with three to six months' worth of expenses
- Pay off very high interest debt (such as payday loans)
- Have a bit of extra money you can use to try to build a more secure future
You don't need much money to get started
The good news, though, is that you can open a brokerage account and get started even with a very small amount of extra money. You don't need thousands -- or even hundreds -- of dollars to get started.
There's an abundance of brokerage firms that have no minimum investment requirements and that charge no monthly fees. Most have eliminated commissions on trades, so you can buy stocks and ETFs without paying a fee. And many allow you to buy fractional shares, which means you can buy partial shares if you can't afford full ones.
Thanks to these brokerage account features, it can make sense to open an account once you have as little as $5 or $10 to invest. You can move small amounts of money over into your account whenever you have spare cash, and you can buy almost any asset that you want. You aren't limited to high-risk penny stocks -- and if you buy fractional shares, you'll earn the same percentage return as any investor no matter how many shares they have.
While it may seem silly to open a brokerage account to invest small sums, the reality is that you can build on that amount and put your money to work for you. Over time, a bunch of small investments might eventually add up to a lot, so it could pay to get started once you've got a little cash to spare. It can be the first step to building a better future.
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