Many people think they need a lot of cash before they can consider investing in stocks, bonds or funds, but this is not necessarily true. There are several methods of purchasing investments, some of which allow you to make purchases with smaller dollar amounts or even by using someone else’s money. Here are some ways you can invest:
Buying on margin: borrow to make investments. Buying on margin lets you borrow money from a broker to make investments, and sometimes for other purposes. You borrow the funds, buy the investment, sell the investment when it increases in value, pay the broker the amount you borrowed, plus interest, and keep the profit. This strategy works if your investments increase in value. However, if you guess wrong and the value of the investment declines, you risk financial loss. Buying on margin is for sophisticated investors with high-risk tolerance.
Dollar cost averaging: accumulation through steady investing. Dollar cost averaging is a plan that allots a set amount to buy investments at predetermined intervals, such as monthly, quarterly, or annually. Dollar cost averaging operates on the law of averages: Over time, your costs may be lower because you invest a constant amount regardless of price fluctuations. When you use this strategy, there is no need to try to buy only when the price seems low.
The amount you invest at each interval doesn’t have to be large. It might be $100 or even less. Your periodic investments could be paid by payroll deduction or bank authorization (see below). That way, you at least begin an investment plan, probably won’t miss the money, and won’t be tempted to spend the money elsewhere.
Lump-sum investing vs. periodic investing: Lump-sum investing is just what its name implies: investing a sum of money at one time. The sooner you get your money working for you, the longer your opportunity for potential gain from having committed all your funds right away. However, you need cash up front.
By comparison, periodic investing, such as dollar cost averaging (see above), lets you invest in smaller increments more frequently. The use of periodic investing can allow you to begin sooner than if you had to wait to accumulate a large sum of money.
Short sale: sell stock you don’t yet own. A short sale is a sophisticated investing method used by those with a high tolerance for risk. It involves selling stock you don’t own, hopefully for more than you will pay for it when you buy it back. You borrow the stock from your broker, sell it, then buy it back when the price decreases. You return the borrowed stock and pocket the difference between the selling and the buying prices. Although this method of investment-buying offers the potential for significant returns with little initial investment, you must also be aware that you could face unlimited losses.
Other methods of purchasing investments: There are a variety of other methods of purchasing investments. The best process for you depends on your particular circumstances and objectives. For instance:
• You can share the duty of researching a potential investment by buying investments with other members of an investment club.
• You may be able to buy stock directly from the issuing company or have dividends reinvested automatically.
• If you are risk averse, you can use earnings from the investments in your current portfolio to buy other investments.
BARBARA KENERSON is first vice president/Investments at Janney Montgomery Scott LLC and can be reached at BarbaraKenerson.com