I currently have a small sum of money of less than $1000, but will be reaching greater than $1000 over the summer due to a summer waiter job. I have been reading about the stock market, but so far I heard that it is pretty much pointless to invest unless you have a larger sum of money, so what do I do here? Keep saving and not invest or put towards a smart investment?
What is the goal of the money? If it is to use in the short term, like savings for a car or college, then stick it in the bank and use it for that purpose.
If you really want this money to mean something, then in my opinion you have only one choice: Open a ROTH IRA with something like Vanguard or Fidelity and invest in an index fund. Then do something that will be very difficult: Don't touch it.
By the time you are 65, it will grow to about 60,000. However, assuming a 20% tax bracket, the value of that money is really more like 75,000.
Clearly this will not make or break you either way. The way you live the rest of your life will have far more of an impact. It will get you started on the right path.
BTW this is advice I gave my son who is about your age, and does not earn a ton of money as a state trooper. Half of his overtime pay goes into a ROTH. If he lives the rest of his life like he does now, he will be a wealthy man despite making an average income. No debt, and investing a decent portion of his pay.
Most important: Any gains you make from risking this sum of money over the next few years will not be life changing, but if you can't afford to lose it, then losses can be.
Rhetorical question: How can you trust what I say you should do with your money?
Answer: You can't.
I'm happy to hear you're reading about the stock market, so please allow me to encourage you to keep learning. And broaden your target to investing, or even further, to financial planning. You may decide to pay down debt first. You may decide to hold cash since you need it within a couple years.
Least important: I suggest a Roth IRA at any online discount brokerage whose fees to open an account plus 1 transaction fee are the lowest to get you into a broad-market index ETF or mutual fund.
The classic answer is simple. Aim to build up a a financial cushion that is the equivalent of 3 times your monthly salary. This should be readily accessible and in cash, to cover any unforeseen expenses that you may incur (car needs repairing, washing machine breaks down etc).
Once you have this in place its then time to think about longer term investments. Monthly 'drip feeding' into a mutual stock based investment fund is a good place to start. Pick a simple Index based or fund with a global investment bias and put in a set amount that you can regularly commit to each month.
You can get way more complicated but for sheer simplicity and longer term returns, this is a simple way to build up some financial security and longer term investments.
Hopefully this $1000 is just a start, and not the last investment you will ever make. Assuming that, there are a couple of big questions to consider:
One: What are you saving for? Are you thinking that this is for retirement 40 or 50 years from now, or something much sooner, like buying a car or a house?
You didn't say where you live. In the U.S., if you put money into an IRA or a 401k or some other account that the government classes as a retirement account, you don't pay taxes on the profits from the investment, only on the original principal. If you leave the money invested for a long period of time, the profits can be many times the original investment, so this makes a huge difference.
Like suppose that you pay 15% of your income in state and local taxes. And suppose you invest your $1000 in something that gives a 7% annual return and leave it there for 40 years. (Of course I'm just making up numbers for an example, but I think these are in a plausible range. And I'm ignoring the difference between regular income tax and capital gains tax, etc etc. It doesn't change the point.) If you put the money in a classic IRA, you pay 0% taxes the year you open the account, so you have your full $1000, figure that compound interest for 40 years, you'll end up with -- crunch crunch crunch the numbers -- $14,974. Then you pay 15% when you take it leaving you with $12,728. (The end result with a Roth IRA is exactly the same. Feel free to crunch those numbers.)
But now suppose you invest in a no-retirement account so you have to pay taxes every year. Your original investment is only $850 because you have to pay tax on that, and your effective return is only 5.95% because you have to pay 15% of the 7%. So after 40 years you have -- crunch crunch -- $10,093. Quite a difference.
But if you put money in a retirement account and then take it out before you retire, you pay substantial penalties. I think it's 20%. If you plan to take the money out after a year or two, that would really hurt.
Two: How much risk are you willing to take? The reality of investment is that, almost always, the more risk you take, the bigger the potential returns, and vice versa. Investments that are very safe tend to have very low returns. As you're young, if you're saving for retirement, you can probably afford a fairly high amount of risk. If you lose a lot of money this year, odds are you'll get it back over the next few years, or at least be able to put more money into investments to make up for it. If you're 64 and planning to retire next year, you want to take very low-risk investments.
In general, investing in government bonds is very safe but has very low returns. Corporate bonds are less safe but offer higher returns. Stocks are a little more. Of course different companies have different levels of risk: new start-ups tend to be very risky, but can give huge returns. Commodities are much higher risk. Buying on margin or selling short are ways to really leverage your money, but you could end up losing more than you invested. Mutual funds are a relatively safe way to invest in stocks and bonds because they spread your risk over many companies.
Three: How much effort are you willing to put into managing your investments? How much do you know about the stock market and the commodities market and international finance and so on, and how much are you willing to learn? If your answer is that you know a lot about these things or are willing to dive in and learn a lot, that you can invest in individual stocks, bonds, commodities, etc. If your answer is that you really don't know much about all this, then it makes a lot of sense to just put your money into a mutual fund and let the people who manage the fund do all the work.
First off, monozok is right, at the end of the day, you should not accept what anyone says to do without your money - take their suggestions as directions to research and decide for yourself. I also do not think what you have is too little to invest, but that depends on how liquid you need to be. Often in order to make a small amount of money grow via investments, you have to be willing to take all the investment profits from that principle and reinvest it. Thus, can you see how your investment ability is governed by the time you plan to spend without that money? They mantra that I have heard from many people is that the longer you are able to wait, the more 'risk' you can take. As someone who is about the same age as you (I'm 24) I can't exactly say yet that what I have done is sure fire for the long term, but I suggest you adopt a few principles:
1) Go read "A Random Walk Down Wall Street" by Burton G. Malkiel. A key point for you might be that you can do better than most of these professional investors for hire simply by putting more money in a well selected index fund. For example, Vanguard is a nice online service to buy indexes through, but they may require a minimum.
2) Since you are young, if you go into any firm, bank, or "financial planner," they will just think you are naive and try to get you to buy whatever is best for them (one of their mutual funds, money market accounts, annuities, some flashy cd). Don't. You can do better on your own and while it might be tempting because these options look more secure or well managed, most of the time you will barely make above inflation, and you will not have learned very much.
3) One exciting thin you should start learning now is about algorithmic trading because it is cool and super efficient. quantopian.com is a good platform for this. It is a fun community and it is also free.
4) One of the best ways I have found to watch the stock market is actually through a stock game app on my phone that has realtime stock price feed. Seeking Alpha has a good mobile app interface and it also connects you to news that has to do with the companies you are interested in.