Figuring out how to invest is, like many things, harder with fewer dollars. Higher fees, fewer investment options and diversification can be obstacles, but they aren’t insurmountable. Here are four ideas for the best way to invest $1,000.
» Ready to get started? Check our picks for the best online stock brokers for beginners.
1. Invest for retirement — or, how to double your money with a 401(k)
You read that right: If your 401(k) offers matching dollars, that $1,000 could very quickly turn into $2,000.
How? Depending on your plan, when you put money into your 401(k) — which happens as a salary deferral, before taxes — your company may put money in, too.
How much money depends on the matching percentage, but it's common for companies to match half or all of your contributions, up to 3% to 6% of your salary.
Most 401(k) plans don’t accept lump-sum contributions, so your $1,000 figures in this way: With your paycheck a bit smaller because of a 401(k) deduction, you can use the $1,000 as a cushion if you come up short on your monthly bills or you can repay yourself the difference each pay period.
If your employer doesn't offer a match or you've already maxed out your free money, then you'll want to consider opening an IRA.
An individual retirement account is like a 401(k) you open on your own.
Because you’re flying solo, there’s no match, but you still get a host of tax benefits, including the choice of tax-deferred or tax-free investment growth. (See the difference between traditional and Roth IRAs.)
Another perk of an IRA is that it’s easier to find one of these with no — or at least a low — minimum deposit requirement.
Many standard brokerage accounts require deposits too rich for your blood, but most of the brokers on our list of best IRA providers will gladly work with your $1,000.
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$5 to $1,000
in free stock for users who sign up via mobile app
2. Buy commission-free exchange-traded funds
Getting in the door of that IRA is only half the battle. Now you’ll likely face a slew of investment choices that are, sadly, out of your reach. Many mutual funds and index funds require minimum investments of more than $1,000.
ETFs, however, are a kind of index fund with features that make them a good choice for small-dollar investors.
Although all funds charge an expense ratio — a percentage of your investment that goes toward the fund’s operating expenses — ETFs are on the low end of the cost spectrum.
ETFs trade on an exchange like a stock, which means the minimum investment is a share price. That share price could be as little $5 or $10. The benefit of that, beyond the fact that it’s a minimum you can meet, is that with $1,000 you can put together a few ETFs, which are necessary for a diversified portfolio.
Just note the words "commission-free": Because these funds are traded, you pay a commission to buy and sell. Buy five funds at a $10 commission, and you’ve already lost 5% of your investment to fees. Pick a broker with commission-free ETFs, and you’ll avoid that cost.
3. Use a robo-advisor
If the idea of picking ETFs bores you, terrifies you or both, you’ll probably like these services. Robo-advisors are robot-powered — or, less fun and sci-fi-sounding but more accurate, computer-powered — investment managers. They buy fractional shares, which means you could own 10 or 12 ETFs with $1,000, and manage your portfolio as needed. Better still, many of them are geared toward small account balances, with no minimum. You’ll also pay fund expense ratios, but robo-advisors typically use low-cost funds.
For more, read our roundup of the best brokers for robo-advisors.
4. Trade for free
Again, costs can make or break a small balance, so if you’re keen to trade stocks, here are three tips that, admittedly, border on nags:
Investing for retirement may be a priority, and low-cost index funds and ETFs are options to do that.
Researching the companies behind the stocks can be the difference between trading stocks and throwing your money away.
Some brokers don't charge commissions — free trading is common these days.
» Learn more: How to buy stocks
Want more help with finding the best way to invest $1,000?
If you're tempted to open a brokerage account but need more advice on choosing the right one, see our roundup below of the best brokers for beginner stock investors. It compares today's top online brokerages across all the metrics that matter most to investors just starting out: fees, minimum balances to open and investor tools and resources.