It is a common misconception that you need a lot of capital to make money as an investor. In the financial markets, it is possible to generate an investment income even if you have little money to get started.
Binary Options Trading
A great way to get started with investing in the stock market when you only have a small amount of money is to trade binary options.
Binary options are financial derivatives that allow you to place a bet on the price of an underlying asset, such as a stock, an index or a currency pair, to either end up higher or lower after a predetermined time horizon. These time horizons can be as short as five minutes or as long as a day, but most traders prefer the shorter time horizons to benefit of spikes in the market after market-moving headlines or economic data announcements.
It is very easy to get started with binary options trading, which is one of the main reasons why it has gained such popularity in recent years. If you are new to financial trading and you are not yet fully versed in using stop losses and target prices, and are unsure as to when to sell your winning trade or cut your losses on a losing trade you can alleviate these issues by simply using binary options. When trading binary options, as the name suggests, the outcome is always binary. Either you win on a trade and make a profit or you lose your initial investment.
For example, you can bet on the price of gold increasing after a negative U.S. economic data announcement by going long on a 10-minute binary option on gold, if you believe gold will go up in response as it is a “risk-off” asset class. Alternatively, you could go long a 10-minute binary option of a stock just after positive news about the company was announced.
One of the main benefits of binary options trading is that you can use leverage to boost your returns but your downside risk is always limited to the money you placed on each trade.
Another way to invest in stocks with only a small amount of available capital is through CFD trading. CFDs (contracts-for-difference) are financial derivatives that allow you to trade stocks and other securities using leverage. That means you can move for example 10, 20 or 50 times the amount of your initial capital outlay.
You can trade CFDs on stocks, indices, currencies and commodities through your online broker with leverage ratios of 25:1, 50:1 and even up to 200:1 at times. That is the reason why CFD trading is particularly interesting for people who only have small amounts of capital available as leverage allows you to make big gains with small amounts of invested capital.
However, when trading CFDs it’s important to always work with stop-losses to prevent you from losing more than you have invested. Unlike binary options, the leverage you are using when trading CFDs can also work against you and exasperate your losses if the trade goes in the wrong direction. Hence, it is important to limit your downside risk with stop-loss orders, which are automatic sell (or buy) orders that are executed when a trade moves against you and hits a pre-determined level.
Alternatively, you could take a more passive approach to investing and use a micro-investing service such as Acorns. Acorns allows you to connect your bank cards to your micro-investing account, which then automatically invests spare change that it rounds up from your daily financial transactions into a diversified portfolio of ETFs (exchange traded funds).
For example, if you purchase a sandwich for lunch that costs you $3.50, Acorns will take 50 cents and invest in an ETF portfolio that is tailored to your risk profile. To determine your risk profile, you are asked to fill out a risk assessment questionnaire that involves questions about your investment goals, investment horizon and level of risk-aversion when signing on to Acorns. Once a portfolio is agreed upon, Acorns will automatically start investing your spare change into your portfolio.
If you want to get started with investing but only have a small amount of investable capital, you can try any or all of the above-mentioned investment approaches and start generating investment income.