I Have Only $500, Can I Invest? Should I Invest?

If you are a potential investor with limited funds and market knowledge you may well

be wondering how to get on the bottom rungs of the investing ladder. Of course the expression "limited funds" means different things to different people. For this article I will assume an amount of $1,000 but the comments I make could also possibly be applied to $500.

If you are considering investing, decide how much risk you are prepared to accept. Can you seriously accept a risk which could mean you losing all of your $1,000 dollar stake? If you can't then act accordingly.

There are three possible ways of investing you could consider.

First you could invest in what are generally termed managed funds. These are usually linked to some particular investment type or track some particular index and are managed by a professional investment manager. For example this type of fund might track the FTSE 100 companies or the Nasdaq. It could also be linked to emerging markets, the Asian market for example.

If you choose this type of investment your funds are relatively safe but you still could find the value of your fund has fallen if the market conditions are difficult. Any bonuses or dividends are usually re-invested although you could ask for them to be paid annually to you. There will be a charge made generally annually to your account for managing your money. The advantage of this type of investment over the self selection of an individual stock, is that the funds are usually widely spread across many different corporations or government stocks thus reducing the risk as you don't have "all your eggs in one basket". Also, the choosing is done for you rather than you having to do the research.

You may not have that type of investment in mind and prefer instead to choose your own. This is good experience but requires you to do some research. When you have fixed on something you feel has promise, you will I am sure already know that to buy the stock you choose, will involve you in dealing costs. If you need someone simply to buy them on your behalf and nothing more, with $1,000 to invest you should allow 2-3% for that purpose depending on the number of stocks chosen. I would suggest that with $500 you stick to one stock and $1,000 with one or two at a maximum. Otherwise as the number of stocks you purchase increases, the buying costs (and eventual selling costs) will become disproportionate.. Shop around, you can usually see bargain dealers on the net.

On the other hand if you need someone to advise you as well as carrying out the transaction, you will obviously have to pay more.

Before instructing someone to carry out the transaction, check on the dividend position. I am sure you know that the dividends are amounts paid out by a company to shareholders each year. Sometimes, depending on the prospects for the company, the dividend may be reduced or on the other hand it may be increased. The important point to discover is when the dividend is to be paid. If it is due very soon then clearly the stock may well be at a premium price compared to a stock where the dividend has just been paid and the stock holder may have to wait almost one year before receiving any benefit. You will be given the option of re-investing the dividend or receiving it. If it is not desperately needed my advice is to re-invest. It is quite amazing how quickly it grows.

The third type of purchase you might consider is the purchase of Option contracts. You may notice I do not describe them as investments, since you do not actually buy anything or own anything. What you are doing is pure speculation. This type of speculation is known by the general name of "derivatives". Essentially the idea is to enable you to buy the right but not the obligation to purchase specific stock at some time in the future at a certain price or conversely the right but not the obligation to sell specific stock etc. I intend to cover this subject only briefly in this article but if you are interested in this type of speculating, you should read up on it. There is much to learn. There is no doubt it is a very profitable field but also a very dangerous one in that you might well finish losing all of your investment fund.

But there is another way of combining the last two types of activity, that is the selection of a particular stock with the purchase of Option contracts. In the system I am referring to, the stock option is used as an insurance policy to guarantee the value of your purchase. Obviously any form of insurance costs money but by putting this stock option in place to act as a safety net if your stock value falls, you can afford yourself a great deal of protection. More on this and derivatives in general in a forthcoming article.

by: Francis Meehan

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