Investing that first $1,000 can prove extremely challenging, especially for people who have had little exposure to the investment world. Through smart investing, individuals can watch their wealth grow. However, uninformed investments can result in devastating losses. To the new investor, $1,000 is a lot of money to gamble with, so all investments are essentially a risk. For that reason, novices should investigate their options and choose the one that they are most comfortable with given the potential for return. Typically, lower-risk investments have less impressive returns whereas less predictable investments have a higher chance of a major payoff. The following is a look at some of the most common choices for individuals as they invest their first chunk of money.
While not all mutual funds are accessible to the novice investor, there are still options that maximize returns while minimizing risks. Accounts with lower minimum investments are typically those designed to save for retirement. These accounts are often designed to be as simple as possible to the novice investor, and people of all ages can open them.
Investors get the most out of mutual funds when they continue to put money into the associated account. Thus, while many accounts can be opened with $1,000, they are often the best choice for people who plan to put a little bit of money every month into the account or who see themselves investing other large chunks in the future. If investors are saving for retirement, they should link the mutual fund to an IRA or 401(k) plan to take advantage of tax savings.
Individuals who are looking for a one-time investment may prefer exchange-traded funds (ETFs) to mutual funds. ETFs are similar to stocks in that they can be purchased and sold on an exchange. Much like mutual funds, ETFs hold a large number of assets. Therefore, they provide the broad asset-class exposure that many first-time investors want without the need to invest several thousands of dollars.
Unlike mutual funds, people cannot continue to invest by placing money into an account; they instead need to purchase new ETF shares. Over time, this process can become overwhelming and it may make more sense to funnel investments into a single account that does not involve constant purchases and sales. At the same time, ETFs are a great introduction to the basics of the stock market.
Some people do not think about real estate when they consider an investment. After all, what kind of real estate can people purchase with $1,000? Investing in real estate does not always involve purchasing new properties. People who already own a home may want to think about investing money into the house or the land to increase its value. For example, modernizing a kitchen or installing a pool can add a great deal of market value, and thus equity, to the home.
A second option for investing in real estate with $1,000 is a real estate investment trust (REIT). An REIT is basically a mutual fund that focuses on real estate investments. Typically, these trusts diversify interests across different real estate asset classes to provide the same risk mitigation of a traditional mutual fund.
Certificates of deposit
The Federal Deposit Insurance Corporation insures CDs, which makes them one of the safest means of investing money. In fact, it is virtually impossible to lose money through a CD. For that reason, however, the interest rate paid on them is very low. A typical one-year CD pays under 1 percent in interest. However, individuals can find better interest rates by investing in longer-term deals. This strategy results in significantly reduced liquidity, although it is possible to find CDs that do not impose a penalty for withdrawing money early.
CDs are a good option for new investors because they have such low risk. The decision to take on risk depends largely on someone’s age. Individuals in their 20s can make riskier investments than people in their 40s because they simply have more time to recoup losses in the future. A major loss means more conservative investing in the future for the 25-year-old investor, whereas it could mean delayed retirement for someone 20 years older.
A bond is essentially a loan to a corporation, government agency, or similar entity. The investor becomes a creditor for the term of the bond and receives interest on the loan. Bonds can have terms ranging from a few months to several decades. At the end of the term, the bond is repaid in full plus any necessary interest. However, bonds do have a degree of built-in risk since it is possible for the organization to default during the repayment period. People typically consider bonds safer than stocks since bondholders receive payment before stockholders should the organization face insolvency.
Bonds receive a rating based on the risk of insolvency. Corporations with a high rating are less willing to pay high interest rates than those with a lower rating. Thus, just like with many other types of investment, a high pay-off means accepting more of a risk.