You'll find some amazing bargains as you walk through the aisles of your local warehouse-shopping outlet. Unfortunately, a lot of the time you have to buy way too much of a given product to get those savings. Investing can be like that, too. It's often hard for a small investor to take a position in emerging global markets, where large players often make huge returns. However, even an amount as low as $500 can get you started with some types of investment.
About Global Markets
Fund managers use global investments to increase the diversity in their portfolio. If you have too much of your money in one country, even a robust one like the United States, your funds can be badly hit by a downturn in that country's economy. If you're invested in companies from several of the world's major economies, it's less likely that a downturn in one can cost you badly. Even if there's a worldwide economic crisis, some economies will rebound faster than others and give you improved returns. Depending how you've chosen to invest, global markets can also provide larger returns in good times.
Investing directly in foreign markets can be difficult, especially for small investors. Unfamiliar bureaucracies, complex paperwork and currency exchange are just some of the risks, even when minimum investment levels and brokerage fees are left out of the equation. However, many foreign equities are traded on American markets as American Depositary Receipts, or ADRs. American institutions create ADRs by purchasing a large quantity of a foreign stock, then selling percentage shares in that bulk investment on American exchanges. It gives a small investor the opportunity to purchase overseas stocks individually, with professional managers to handle all the inconvenient details.
Using the $500 to buy ADRs adds a degree of diversity to your portfolio, but mutual funds might be a better option. A mutual fund pools your $500 contribution with money from thousands of other small investors, and uses that pool of capital to invest in a large, diversified portfolio. Remember that global market mutual funds vary widely in style, the same as any other funds. Choose one that matches your investment goals. Some invest conservatively in overseas dividend stocks or "blue chip" companies, while others look for maximum returns by investing in high-risk emerging markets or new technologies.
Exchange-Traded Funds, or ETFs, have some similarities to mutual funds. Both represent diversified portfolios of investments, purchased on a pooled basis. The fund usually tracks the performance of one of the major market markets, such as the Nikkei, through a suitable index of representative stocks. Large blocks in the fund, called "creation units," are purchased by financial institutions that pay for them with other equities, rather than cash. Those institutions, in turn, sell shares to investors. The shares are traded on major exchanges, in the same way as individual stocks.
Investing and Keeping Score
Remember, every investment has risks. Investing in companies and countries with which you're unfamiliar carries the extra risks of unfamiliarity and international currency exchange. With a $500 investment, brokerage fees would cut sharply into your capital, so it's often worth setting up an online no-fees or low-cost brokerage account to handle the transaction. If you want to invest long term, a mutual fund might be your best choice. If the $500 is your "Vegas money," or you want to manage your investment hands-on, choose ADRs or ETFs and use your no-fees online account to make advantageous trades from day to day.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.