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How to Invest $1000

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Suppose you've just received a bonus at work, or an inheritance, or a winning lottery ticket, or have saved up for a while and have a cool $1000. What can you do with it? If you've been thinking about investing in the stock market, you can do a lot with a thousand dollars.

Understand Your Investing Goals

Before you buy any stocks or bonds or funds, you need a realistic idea of what you hope to accomplish. You may have seen an ad which promises that "penny stocks can triple your investment overnight!" Don't believe it. The good news is that a careful investment is likely, over time, to pay off a lot more than the 0.35% return you'll get from a bank money market account right now.

The bad news is that a reasonably safe and stable return rate is, on average, 8-10% over a period of several years. In other words, you can expect your $1000 to turn into $2000 in seven to twelve years. That doesn't seem like a lot... but it's a start, and there are ways to do better. Investing with little money can earn you big returns, if you do it with discipline.

How to Begin Investing in Stocks

If you've set your expectations accordingly and accept that an 8% annual return is good, you have an easy choice to make. Ask yourself if you want to manage an investment—if you want to spend a couple of hours a month looking for good stocks and reviewing your portfolio—or if you want to buy and hold for years and forget about it. If you're the buy and hold and ignore things type, that's great! All you need to do is find a good index fund. One of the most popular is S&P 500 index fund, because it's simple, it's reliable, and it's cheap.

By putting $1000 into an index fund, you choose simplicity and you get diversification and remove the temptation to make a lot of trades. This decreases your risk. If you're asking how to begin investing in stocks, start here!

A Large-Cap Stock as a First Investment

If you prefer to be a little bit more active in your investments, look for an undervalued stock. You're better off sticking with a medium or large company, because they're likely to be more stable (less likely to have catastrophic financial problems) and they have more available analysis online for you to read.

You need to do a little bit of research to figure out things like present value and the measurements of stock earnings which apply to the price of a stock, but if you're patient and do your homework, you can find great companies at good prices. For example, in a year and a half, an investment of $1000 in Boeing turned into $2100—but your author bought Boeing at a bargain. You won't always be able to find a bargain for every stock you want, but you can keep your eyes open.

The advantage in this scenario is that you have the opportunity to make a lot better return than if you kept your money in an index fund. An average 15% annual return is plausible, if you're careful. The disadvantages are two: first, you're more likely to suffer a loss (even a temporary loss on paper) due to lack of diversification; and second, you may have to wait before you find a good value and lose out on potential gains you might have achieved from the index fund strategy.

Patience is, strangely, more important with the individual stock picking strategy.

Of course, nothing says you can't pursue a hybrid strategy: split your investment with $500 in an index fund and $500 in an individual stock. This is one of the best ways to invest, if you do your homework to pick a good stock. Be careful, however—new investors may not immediately see one cost of this approach.

How Not to Invest 1000 Dollars

No matter what you do, patience is a virtue. You don't have to double your money in a week to be a successful investor. (In fact, you're probably not going to double your investment overnight... or in a week... or in a month... or in a year. That's rare. If you want to make $1000 a month by investing, you need to invest $100,000 or more.)

Remember that every trade you make costs you money. Buying $1000 of an index fund will cost you between $5 and $10. Selling that same index fund will cost you the same. You'll have to make back $10 or $20 just to break even (and that's not even counting what taxes you pay on any gains). Every trade you make will incur a commission (and probably taxes), so if you're shifting your investments around every day or week or month, you'd better be making a hefty profit to make up for it.

There's little point in trading less than $500 at a time, because at that point the fees are too high to what you expect to get in returns.

Also keep in mind that there's a difference between a stock with a low price per share and one that's currently a bargain. For example, a penny stock may seem like it has an upside but be a terrible, expensive investment at $0.50 a share while a boring blue chip like IBM may be a bargain at $500 a share.

That's not always obvious to new investors. It makes sense when you think about it, if you're willing to do the work to figure out what a share price really means, but if that lesson hasn't sunk in yet, you're better off putting your $1000 into a simple index fund for now.

How to Invest 1000 Dollars a Month

If you're fortunate enough to have a thousand dollars a month to invest, the same strategy can work for you. If you pursue a full index fund strategy, pick a day on which to buy and stick with that every month. (This helps you with something called dollar-cost averaging, where you buy more shares when the price is low and fewer shares when the price is high.) Rather than saving up and buying all in one lump sum, you tend over time to get better returns—even though you'll pay for 12 trades instead of one.

If you pursue the split stock and index fund strategy, you can still use the one trade a month approach. One month buy into the index fund and the next month buy into a stock. This gives you a couple of months to find a good stock at a discount, or to decide to put that money into the index fund instead until you find a great stock.

How to Invest $1000 a Month in a 401(k)

If you have a 401(k) account through your employer and you're fortunate enough to be able to invest pre-tax dollars that way, pick the fund with the lowest fees and the closest to the S&P 500 index. Store your money there. Most fund choices aren't great—they cost you a lot in fund fees—but there's usually something dirt simple like an equivalent of the Vanguard index fund.

In fact, if you're fortunate enough to have employer matching contributions, you effectively have an investment with monthly returns of 100% of the matching amount. You're in a good situation here; you can start investing with little money and steadily watch it grow. Even if it's $100 a month, over time this will add up.