How to Invest 5,000 Dollars
Investing $5,000 is a smart move that in the long run can provide a large return. However, there are many things to watch out for, especially fees and expenses that can quickly eat up a $5,000 investment. A smart move now can provide a nice reward in the future.
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Instructions
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Determine the purpose of your investment as well as the time frame and your risk tolerance. This is necessary to provide some direction in choosing your investment. If you can't afford to lose any of this money, then you have a low risk tolerance and should choose safer investments. Same thing if you will need the money in the short-term time frame of the next two years. If, on the other hand, you won't need to touch the investment for several years and can stomach some ups and downs in between, the riskier investments often have a higher return over time.
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Research investment accounts. Once you've determined what investments are appropriate for you, determine how you will purchase your investment. The most common non-retirement way to purchase investments is through a brokerage account. A brokerage account is an account with a financial institution that allows you to buy and sell investments with the money in that account. Many companies have a minimum opening balance, so be sure that your $5,000 is enough. Also, many companies charge some sort of monthly or annual fee for accounts with a balance below a certain amount. Be sure to avoid these accounts. A $50 fee represents 1 percent of your account value and that is before the costs of purchasing your investment.
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Research non-traditional account options. There are many ways to invest other than with a brokerage account. These include DRIP programs, mutual funds bought directly from the mutual fund company and programs such as ShareBuilder. With DRIP programs, you purchase shares directly from the company, and the dividends paid on those shares are reinvested in the company stock to give long-term growth in the number of shares. Mutual funds are sometimes sold directly from the fund company themselves. This may allow for a lower minimum balance and fewer expenses. Vanguard and Fidelity are popular mutual funds that offer this. Finally, ShareBuilder is a program that allows for low-cost stock purchases and reinvestment of dividends. Unlike a DRIP program, you can hold multiple stocks in ShareBuilder, though each transaction will carry its own fee.
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Open your account. Regardless of which route you take, you will need to fill out some paperwork to open the account. Contact the company that you have chosen to do business with. In the case of DRIP programs, contact the company whose stock you want to buy.
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Purchase your investment. Contact the company that opened your account to inform them of your instructions. For some accounts, you may have included the instructions with your application and therefore don't have to do anything.
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Tips & Warnings
Beware of fees, charges and other expenses. A $5,000 investment will earn only $500 with a 10 percent return, so be careful not to let that get eaten up with fees. A $50 annual fee plus $19.99 commission on your purchase takes a big bite out of that $500 profit.
This is not an offer to buy or sell securities. This is not a recommendation to buy or sell. Always read the prospectus before purchasing any investment. Always read the account forms and contracts before opening any account.
References
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