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How to invest small amounts of money

Many people put off investing for the future because they think they need thousands of pounds to get started. This just isn’t true – these days you can start investing with just a small amount of money.

That said, investing even small amounts does have its challenges. Trading fees and commissions can eat into your returns, so it’s important to invest your money wisely. Here, I’ll look at a few smart strategies when it comes to investing small amounts of money.

Investment funds

One of the most effective ways is to invest in funds. Here, your money is pooled together with those of other investors and managed by a professional fund manager who will diversify the total pool over many different stocks. Funds offer a number of advantages over buying individual stocks if you only have small amounts to invest.

Firstly, up-front commissions are lower. If you want to buy an individual stock, most brokers charge trading commissions of around £10-£12 per transaction. If you only have £200 to invest, a trading commission of £10 means that you’ll be down 5% before you’ve even started.

By contrast, with funds, you’ll generally only pay a small fee in the form of a spread (the difference between the buying price and the selling price) when you buy the fund, and then a small ongoing annual fee (this could be somewhere between 0.5-1.5% per year).

Another advantage funds offer is they increase your diversification. If you only have a small amount to invest, you might only be able to afford to buy one or two individual stocks. Buying this number is a risky approach to investing because if these companies underperform, you may lose money.

To reduce your risk, it’s a good idea to spread your money over many stocks, and this is what funds enable you to do. Even if you just have a few hundred pounds to invest, your money will be spread over many different companies, reducing your risk significantly.

These days, you don’t need much money at all to start investing in funds. For example, through online broker Hargreaves Lansdown, which offers access to a wide range of world-class funds such as the Fundsmith Equity fund and the Lindsell Train Global Equity fund, you can get started with just £100. You can also set up a monthly investment plan from as little as £25.

All things considered, investment funds are generally an excellent option for those who are looking to invest small amounts.

Individual stocks

Of course, if you do want to invest in individual companies, such as Lloyds Bank or Boohoo Group, with a small amount of money, it certainly is possible. However, my advice would be to stockpile your cash until you have a slightly larger amount to invest so it’s more cost-effective.

For example, if you wait until you have £750 to invest in a stock, instead of £200, a £10 trading commission will only represent 1.33% of your capital, which is a far more reasonable transaction cost. Just remember though, owning only one or two stocks is quite risky, so you’ll want to diversify your portfolio as quickly as possible. 

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Edward Sheldon owns shares in Hargreaves Lansdown, Lloyds Bank and Boohoo Group and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund.The Motley Fool UK has recommended boohoo group, Hargreaves Lansdown, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.