Research the best things you can buy for $100 and you might see drones, hoverboards, and voice-activated coffee makers. Fun stuff, for sure, but there's a different angle you can take with $100. Invest it and set yourself on a course for financial independence. Here are four affordable ways to get started.
Exchange-traded funds (ETFs) don't have the minimum investment thresholds you'll find with some mutual funds. You can buy a single share if that's all you can afford.
An ETF that tracks the S&P 500 is a good starting point. That would give you exposure to 500 of the country's largest public companies, including Apple, Amazon, Alphabet, and Tesla (NASDAQ:TSLA). To invest in those names individually, you'd spend more than $6,000 buying a single share of each.
Two S&P 500 ETFs that trade for less than $100 per share are the SPDR Portfolio S&P 500 ETF (NYSEMKT:SPLG) and the SoFi Select 500 ETF (NYSEMKT:SFY). The SPDR fund is a traditional index fund that seeks to replicate the performance of the S&P 500. The SoFi fund has a growth spin; it weights its holdings differently than the index to maximize growth.
When researching index ETFs, pay attention to each fund's expense ratio and tracking error. Lower is better for both values. Tracking error is the gap between the fund's performance and the performance of the underlying index. The expense ratio should account for most of the tracking error.
Dividend stocks are another good choice when your investing budget is tight. You can reinvest your dividends automatically, so your position grows with less money out of your pocket. Three popular dividend stocks that trade for less than $100 per share are Coca-Cola (NYSE:KO), Walgreens Boots Alliance (NASDAQ:WBA), and Verizon (NYSE:VZ).
To evaluate dividend stocks, look for signs that the dividend is sustainable. You want to see a payout ratio below 75%, ample and consistent cash flow, growing profitability, and manageable debt levels.
You do give up on diversification if you kick off your investing career with one or two dividend stocks. That can leave you with more volatility than you want. For that reason, you may prefer to start with ETF shares and then gradually build up your stock portfolio to 20 or more positions over time. Or, you can invest in fractional shares, explained next, for immediate diversification at a lower price point.
Some brokerages allow you to buy stock shares in units of less than one. These are called fractional shares. They function mostly the same as whole shares, but on a smaller scale. If you buy half a share of a dividend stock, you'd pay half the normal share price and earn half the per-share dividend.
The rules for fractional investing vary from broker to broker. Terms to watch are minimum purchase amounts, investments available for fractional buys, fees charged for buying or selling fractional shares, and the time it takes to settle a fractional order.
Choose your broker carefully because you don't want to move later. You generally can't transfer your fractional shares from one broker to another. You'd have to sell the fractional position first and then move your cash.
If you have a 401(k), use your $100 to increase your retirement contributions. 401(k)s will invest any dollar amount, so you don't have to worry if it's enough to cover a single share. Plus, you'll get an immediate tax break on the contribution increase. You may also get a matching contribution from your employer.
Many 401(k)s offer a target-date fund (TDF) as an investment option. TDF portfolios usually hold stocks, bonds, and cash, in a mix that gradually gets more conservative as you near retirement.
This adjustment from aggressive to conservative follows a specific plan, called a glide path. Review your fund's glide path carefully. If you agree with the approach, that fund is the only position you need in your retirement account.
What makes more sense: Spending $100 on a cool gadget or investing $100 and changing your life for the better? The answer's easy. Start small, with a single fund share or fractions of stocks, and increase your investing activity as your budget allows. Stay with it and you can roll that $100 into thousands and then tens of thousands -- which ultimately should be way more fun than any gadget.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.