How to Invest $1000 in the Stock Market Today
June 27, 2018
You have $1000. If you put it in a savings account for an entire year you will earn a meagre 60¢.
You know better than to leave your money in an account earning 0.06%. So now you’re now faced with the daunting task of creating an investment portfolio. Assuming you already know how to get money into an investment account, there are two things you need to know:
How to pick a stock (what to invest in)
How to allocate your money between assets (how much to invest in each stock)
So, how do you pick a stock?
As you are just starting out, complicated valuation models and a technical and fundamental analysis may be out of the question. A likelier option is implementing the popular model of Peter Lynch: only invest in what you use and understand. As a consumer, you know about the products you interact with in your day-to-day life. You know what works and what doesn’t, and you may have an intuition of which companies will be around for years to come and those which are already on their way out. Companies that you are interested in and are confident in their success are common stocks to begin investing in.
Then you will want to do initial research into these companies:
- Are they public? If not, is their parent company public?
- Is their company reflected in the news either very positively or very negatively?
Once you’ve chosen your first stock you will want to diversify…
The (very) basics of asset allocation
You can allocate the assets in your portfolio in all sorts of ways, the main four objectives are to preserve capital, generate income, grow your capital and then a combination of income generation and growth.
Since we are creating a growth model portfolio, it is acceptable to have the entirety of the portfolio invested in stocks. But that doesn’t mean we won’t diversify our portfolio.
If, for example, the first company you chose was Starbucks (NASDAQ:SBUX), you may want to choose a company in an unrelated industry. Starbucks falls under Consumer Goods, so let’s look at Telecommunication Services (telecom) for your second stock – Verizon (NYSE: VZ) perhaps.
We can divide the economy into 10 general sectors under the Global Industry Classification Standards:
If you don’t know about 1 or 2 of these sectors you can look into them and any other financial questions you have using one of the 45 tools found on this extensive list. If you don’t know about 8 or 9 of these sectors, don’t worry– your portfolio isn’t doomed. You can stick to what you know at first, expanding your portfolio as you expand your market knowledge.“You can stick to what you know at first, expanding your portfolio as you expand your market knowledge.”CLICK TO TWEET
There is still room to diversify within each sector. Every sector is broken down by industry group, industry and then by sub-industry. Some sectors have over 30 sub-industries, such as the Consumer Discretionary sector (non-essential goods). The sector ranges from Luxury Goods companies such as Tiffany & Co. (NYSE: TIF), to Tires & Rubber companies such as Goodyear (NASDAQ: GT).
As you are starting out your fund with only $1000 you may choose to — or have to, depending on the stocks prices — invest in only a handful of stocks. A standard for diversified portfolios is to have 20-30 stocks, but this magic number has been decided upon by much more established (see: wealthy) investors – when you are just starting out you can’t always follow the guidelines of established investors. In fact, in this case you shouldn’t. Every time you buy a stock you will be paying transaction fees and 20 transactions could cost upwards of $200, meaning you now have $800 invested instead of close to $1000.
One major guideline is to never have more than x% of your portfolio invested in one stock at a time. The common range is between 5-10%. This rule will block you from buying even one share of many companies; how can you have 5% of your portfolio (equal to $50) in Facebook (NASDAQ: FB) when FB is currently trading at around $200? You can’t. And you may have upwards of 20% of your portfolio in one stock.
B-b-but… what if-
A lot of people have a lot of reasons for why not to take the leap and start investing. Other than a complete lack of funds, few of these arguments are sound. A solution to most of these reasons can be found by creating an investment club, as investing is often better with friends.
IF you don’t have the money you can decrease your individual contribution by investing with your friends family or co-workers. Say you invest with four friends, each of you could contribute $200 to create your $1000 portfolio.
IF the level of risk is too high you can invest your $1000 alongside your four friends. Increasing your portfolio to $5000 will allow you to further diversify your portfolio, mitigating some risk.
IF you don’t have the knowledge about the stock market consider this; both you and the people you invest with will bring unique interests and expertise that you can tap into. Investing with people that you trust and that can fill in your knowledge gaps will allow you to make better investment decisions.
IF you don’t have the time, investing with a group can allow you to share the responsibility of tracking your portfolio’s performance and to spread the onus of keeping up with financial news.
You are creating a portfolio with $1000.
The first question is what do I invest in? You’ll start with companies that you use and understand, and as your knowledge of companies and industries broadens, so will your investments.
The second question is how much do I invest in each company? With $1000 you likely will invest in around 2-5 companies, because of this there will likely be an equal distribution of investment among the stocks. Of course, this too is variable.
The third question is why aren’t you investing!? Investing online is the easiest it’s ever been. Tons of companies offer low transfer fees and don’t require a minimum deposit to invest with them.
If an investment club is of interest to you, check out Voleo. The app allows you to invest in groups from 0-100 people with the option of contributing the equal or different amounts to the fund. The app allows members to propose and vote democratically on how to invest their funds If you are serious about investing, your next step should be creating a stock watchlist.