Traditionally, investing has only been accessible to the ultra-wealthy. It seems like you can’t even start investing unless you have a huge lump sum of money lying around, ready to put into your portfolio. But this isn’t always the case. In fact, there are ways to start investing with as little as $500. Alternatively, you could even try your hand at micro-investments. Here are some tips for beginners looking to start small and avoid risky investments.
Research Companies Thoroughly
Before you make a decision on where to invest your money, you should try to learn everything about the business operations of the companies you’re considering investing in. One factor that can help you determine if a company is worth the investment is their Times Interest Earned ratio. The Times Interest Earned ratio or TIE ratio shows a company’s ability to pay off its debt obligations based on the company’s income. A company’s TIE ratio is determined by taking its annual income statements before income taxes or interest payments, and dividing it by its annual interest expense. Depending on the interest expense versus the company’s earnings, the resulting TIE ratio is the number of times the company can repay the total interest expense. The higher the Times Interest Ratio, the higher the number of times a company can repay their debts. Therefore looking at the TIE ratio is a good indicator of a company’s potential for investment.
The TIE ratio is also used as a measure of a company’s risk of solvency. If a company has a high ratio for its times interest earned, then it’s a low-risk for solvency. Conversely, if a company’s TIE ratio is low, then their solvency ratio will be high. The company is a high-risk for bankruptcy because they do have a proportionate amount of income to pay off their interest obligations and income tax expenses. This means that the company is not a good borrower, which is an indication that they would not be a good investment opportunity either. The same principal applies to when creditors run credit checks on applicants. If someone is not likely to repay their debts, then they won’t be approved for a new loan. Therefore, if you are looking into a particular company’s TIE ratio, and see that this is a higher ratio than the others which you’re considering, then that company might be the right choice for you to invest in.
Start an Automated Savings Account
If you’re worried that your net income will not leave you with enough money to make regular investments, then you should consider setting up an automated savings account. Regardless of whether you set this up with your bank, or use a third-party website or app for building savings, making the transfers automated will make saving money simpler. Also, some savings accounts have decent interest rates to help you earn more money. You can set up transfers to your savings account for as little as a few dollars, and you can also select the frequency of these payments. This way, you remain in full control, but the savings account is doing all the work for you.
Choosing the Right Online Broker
Online brokers are a great resource to help you make the most of the money you invest. As a beginner, you may prefer a discount broker rather than a full-service broker. A discount broker can give you all of the essential tools that you will need to get started, as well as lower the risks of your investments. On the other hand, full-service brokers can be extremely expensive, and, even though they do much more in-depth work for their clients, their fees just aren’t in the budget for many investors who are starting out. It is worth looking into both full-service and discount firms in order to get a good comparison of the services they both offer, and then make a decision on what best fits your needs.
The Importance of Diversification
As a beginner who wants to invest a small amount, diversifying your portfolio is crucial. Investing small amounts into several different assets means you aren’t dependent on the performance of one single company in order to make money. Additionally, if one of the small investments you make doesn’t do well, you won’t be down by a large sum of money, and you still have several other sources of possible income to make up for this.
Start with Short-Term Trades and Micro-investments
One popular short-term or micro-investment for beginner, and more conservative, investors are treasury securities. Treasury securities come in three different forms: T-Bills, T-Notes, and T-Bonds. They are known for having short ranges of maturities and being extremely low-risk investments. If you’re looking to invest over a long-term basis, T-Bonds are the best option for you. Though they do take 30 years to fully mature, they have a good semi-annual interest rate.