How to Invest If You Only Have a Small Amount of Cash
Dear Rich Lifer,
Last week, Tesla Inc. (TSLA) shares jumped 13 percent following the announcement of a 5-for-1 stock split.
What does that mean? For a deep dive, in case you missed it… Yesterday, we talked all about stock splits. Click here to read that issue.
But for the purposes of TSLA: on August 28, any owner of Tesla stock will have their shares cut into five. For example, if you own 1 share of Tesla stock for $1.5K, on August 28 when the stock split goes into effect, you’ll own 5 shares of Tesla stock for $300 a pop.
It’s worth noting that the value and ownership of your stock position doesn’t change.
If you’re Tesla, why do this?
Companies split their stock to make it cheaper for investors to buy. If you were to buy one share of Tesla stock today, you’d be looking at a price tag of $1,650.71, as of writing this.
A Tesla split makes the stock more accessible, without changing the company’s overall value.
You can probably guess what a stock split does to the number of buyers, and consequently the price of a stock then — just look at last week.
But the question we should be asking is how relevant are stock splits in 2020?
With more brokerages offering fractional shares, which allow anyone to invest in a company like Tesla for just a few bucks, our answer is not as relevant.
Which brings us to our first way to invest if you only have a small amount of cash on hand.
They are what they sound like. Fractional shares are simply portions of a full stock that you buy for a portion of the full stock price.
For example, if Amazon’s $3,000-plus price tag is too high for you, you could buy a fraction of it. Let’s say your budget is capped at $100. Theoretically, you could buy 0.03 shares of Amazon.
Fractional shares are a smart way to invest if you don’t have much spare cash. They offer you access to established companies on major exchanges at an affordable price.
Besides the stock price and unit of ownership, there aren’t too many differences between fractional investing and traditional investing.
The only differences we could find are the availability, no proxy voting, and transferring of shares.
Availability: Because fractional investing is new, it isn’t widely available yet. Schwab and Fidelity both offer fractional investing. But the most popular places to buy fractional shares are investing apps like Robinhood, Betterment and M1 Finance.
No Proxy Voting: This is sort of irrelevant because you probably won’t be eligible to cast a proxy vote anyway if you’re buying fractional shares to begin with.
Transferring shares: Some brokerages won’t let you transfer fractional shares, they require you to liquidate your shares first. For this reason, fractional investing is not a great long term strategy.
Fractional shares are however a great way to start investing with little money, you can gain access to expensive companies, and easily build a diversified portfolio for less money.
The downside to fractional shares though is the fact that you’re usually limited to established companies where big swings in stock prices are less common.
If your tolerance for risk is a bit higher, another low-cost way to begin investing is through one of our favorites…
The Securities and Exchange Commission (SEC) defines a “penny stock” as a security issued by a small-cap or micro-cap company that trades at less than $5 per share (though some experts choose to adopt a lower cut-off value of $1 per share).
Penny stocks sometimes trade on major stock exchanges, like the NYSE and NASDAQ, but a lot of penny stocks trade directly between buyers and sellers in what’s called the over-the-counter (OTC) market.
What is the OTC market?
Historically speaking, the phrase “trading over the counter” referred to securities changing hands between two parties without the involvement of a stock exchange. But, in the US, over-the-counter trading now takes place on seperate exchanges.
OTC markets refers to the stock exchanges that list over 10,000 OTC securities and consists of three separate stock exchanges:
OTCQX: Only 4% of all OTC stocks listed are traded on this exchange. It’s the most strict in terms of reporting standards and oversight, and usually consists of foreign companies that list on major exchanges abroad.
OCTQB: This market is often called the “venture market,” since this is where a lot of developing companies reside. OTCQB companies have to report their financials and submit to some oversight.
Pink Sheets: Companies traded on Pink Sheets have no reporting requirements and don’t have to register with the SEC. Most stocks that fit the definition of “penny stocks” are found here.
If you’re going to buy penny stocks, start small and begin learning the ins-and-outs of each exchange before you invest a lot.
Find a broker and learn what types of companies trade in the OTC market. Legendary penny-stock investor and teacher, Tim Sykes recommends beginners have a specific goal and strategy in mind before trading. Because penny stocks are more volatile, Tim says you don’t enter these types of investments blindly.
The major advantage to trading penny stocks is their potential upside. You might recall the story of a little-known company called Monster Beverage (MNST), formerly known as Hansen Natural. In 1995, MNST was trading for less than $1. Today, the stock trades at around $80.
The best part about penny stocks is that you can get as close to the ground floor as possible investing without breaking the bank.
So if you have just a small amount of extra cash to invest, penny stocks and fractional shares are both great ways to start investing today.
To a richer life,
The Rich Life Roadmap Team