COMMENTARY | While it is getting harder and harder for little investors to survive in the hyper-regulated American markets, it is still possible to earn more than the 1% offered by your savings account. Most regulations don't affect the big fish, but seriously hamper the small investors. This isn't something you can solve, but it is something you can navigate through with success. Small investors don't often diversify enough, since their accounts are small, but there are ways to spread the money out.
One Share Method
The average person thinks it's only possible to buy 100 share lots of a stock. IBM is at $104, so I need $10,400 to buy into it, right? Nonsense. You can buy 2 shares if you want, and there is still a chance of success. Last year I bought 5 shares of CAT at $80, costing me $400. I sold them at $110, making me $150 profit (before brokerage fees).
A few years ago I had about $5,000 I wanted to invest. How can you spread that around? You buy 100 shares of a $50 stock and you're done with it, right? Not at all. I bought into 5 different companies: 1 share of Google, 10 shares of SINA, 5 shares of CAT, etc. Eventually all 5 companies gave me a profit, ranging from $30 to $200 each. I netted $621 that year, after commissions (a 12% return).
Another way to get in with small money, is the options market. Just don't make the mistake of buying cheap options with little time left. I bought call options on BIDU with a 6 month expiration, and they paid off 105% after 2 months.
Another "small money" place to invest is the currency market or forex (foreign exchange). You can open a forex account with just $500 and control $20,000 in currency on margin (even more outside the US). I would suggest using smaller leverage: buy 1 lot of $10,000 in currency for every $500 in your account. Your stop-loss is respected to the penny, because forex is far more liquid than stocks. I've never been burned on slippage, and since the forex market trades 24 hours a day, you can get out quickly on price jumps at any time - day or night.
Using ETF instruments (Exchange Traded Funds) you can buy into indexes or commodities. GLD is a popular Gold ETF. If you can't afford to buy 1 ounce of gold at $1590 an ounce, maybe you can buy 1 or 2 shares of GLD at $159 each. Just be aware of the commissions charged by your broker, usually about $5 to buy and another $5 to sell. I bought the GLD ETF back at 125 and sold it near the highs at 188 last year. Now I often buy options on GLD instead.
Little fish can survive in a big pond; just swim carefully.
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