Many are unaware of how much it takes to start investing in the stock market, often believing that they require thousands upon thousands of dollars in discretionary income to start building an investment portfolio. That is certainly not the case. Even those with only a few hundred dollars can begin trading in the market with hopes of a lucrative return. Everyone’s financial goals and needs are different. Some are saving for a down payment on a house, while others are focused on saving for retirement. With less than $500, here’s some of the best investment advice we can give you as you enter the world of investing.  

Safer options for first-time small investors include dividend reinvestment plans (DRPs), in which stocks are purchased from companies without the use of a broker, thereby cutting down on commission trading costs.

DRPs are advantageous in that company-paid dividends are automatically reinvested into your share, giving you greater ability to purchase more stock. In terms of initially buying in, as well as with dividend reinvestment transactions, DRPs typically offer much lower fees than going through brokerage firms. Some companies even offer no-fee plans.

Rather than having to buy all at once an entire $250 share of a major company, such as Wal-Mart or The Coca-Cola Company, many companies give you the option to pay in monthly installments.

Individual stock buying is another option for smaller investors. Scottrade and E*Trade are well-established online stock brokerages that offer lower commission fee trading rates than the brick-and-mortar brokerage alternatives, with fees per trade ranging somewhere around $5-$10.

Some discount online brokerages allow you to buy fractional shares from bigger companies, allowing you to better diversify your portfolio.

In terms of diversification, however, mutual funds are one of the safer choices. Mutual funds, which are a professionally-managed and diverse pool of holdings shared among a group of investors, often require large minimum amounts to invest. But not all. Researching lower-minimum mutual funds will likely yield hundreds of options. TD Ameritrade, for instance, offers many that only require an initial $100 investment.

Mutual funds tend to be more risk-averse than individual stock trading mainly because they allow you the safety of a diverse portfolio. In this way, the potential crash of one particular stock does not mean your entire investment is too negatively affected.

Exchange-traded funds (ETFs) are similar to mutual funds in that they represent a set of diverse investments, but differ in that they can be traded throughout the day, like individual stocks. Beginning to invest with ETFs can be a cheaper option as some brokerages offer entry amounts in the $100-$200 range.

Both mutual funds and ETFs are good choices for long-term buy-and-hold investing and are less susceptible to the volatility of individual stock trading.

Do you consider yourself an entrepreneur? As little as $500 dollars can get a small business underway. The options run the gamut: snow removal, bicycle repair, and interest-specific blogs are just a few of hundreds, even thousands, of potentially profitable ideas. Of course, business expenses will increase over time, but by reinvesting in your business, and by prudently planning your budget, profit-making is certainly within reach.  

The last piece of advice we can offer about what to do with your discretionary $500 is to consider peer-to-peer lending. LendingClub and Prosper are two established companies that let you lend money to those with a wide-variety of financial needs, from buying a new car to funding a wedding to retirement-planning. Returns on your loans using peer-to-peer lending can range from 5-8%, a substantial margin of profits for your relatively small investment.

Once you begin seeing a return it’s wise to reinvest. The most important thing about small-time investments is that you start early so that your investment can grow at a greater rate as you reinvest over time.

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