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How much money do you need to invest in shares?

How much money do you need to invest in shares?

Trading for beginner - How much money do you need to invest in shares_

First Published: 13 July, 2022
Last Updated: 28 November, 2022
Fact-checked by Adrian Müller

As a beginning investor, the best time to start investing is now. To emphasize, there is no specific amount you should have to begin with. However, some platforms require a minimum deposit of $500 to $1,000, and the knowledge barrier is significant in the investing space. As a result, many prospective investors save up significant amounts of money to invest, causing them to miss many years of compound interest in the process. This article will cover everything you need to know about gaining investment knowledge and using it to invest in your future.

Table of Contents

Why should you invest in shares now?

Shares offer you the chance to invest money and receive more in the future. At least, that is what you hope to achieve. Therefore, you mustn’t put off investing over the years, especially if you’re planning to stay in the market for a considerable amount of time. The importance of investing sooner rather than later lies in the effect of compound interest, which is the interest on the interest you make both annually or quarterly. While on some platforms, you can start investing with as little as $50, this does not mean you should. Before your investment journey, there are a few things you should take into consideration. 

What is compound interest?

Allow yourself time. When it comes to compound interest, the power of time is everything. To elaborate, you can get lucky in the short run, but there is no such thing as getting rich quickly. The sooner you start saving or investing, the longer you give that money to grow. Therefore, it is critical to begin investing for retirement as soon as possible. The earlier you begin, the less of your own money you will have to save. Compounding can help you grow most of your retirement funds when you start early enough.

 

Compound interest is the interest you earn on your initial balance and the interest earned prior, also known as interest on interest. Interest on interest means that when you invest $100 against 10% interest, you receive $10 at the end of year 1. With common interest, you’ll receive this $10 again next year. However, if you use the benefit of time and keep your interest invested, you’ll earn 10% on 110 in year 2, which will be $11. In this case, compound growth is effectively responsible for getting you higher amounts of interest over the years.

 

Pay down your debts quickly. Whether they are student loans, credit cards, or other debts, compound interest works against you when you borrow money. The faster you pay them off, the less you’ll owe over time.

 

Compound interest and compounding can boost your savings and retirement prospects. Successful compounding allows you to achieve your goals while spending less of your own money. Compounding can work against you when high-interest credit card debt accumulates over time. That is why compounding is a powerful motivator to pay off your debts as soon as possible and start investing and saving money as quickly as possible.

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Getting your finances in order

Don’t forget about emergencies.

When investing, it is essential to remain calm when markets drop significantly. However, if you invest in the market and need to cover expenses without income, your creditors might coerce you into selling your investments. Therefore, it is important that you can cover expensive problems, like a washing machine breaking down suddenly. 

The appropriate amount depends on your financial situation, but a good rule of thumb is to have enough to cover three to twelve months of living expenses. You may need more if you freelance or work seasonally or if your job is difficult to replace. Then, if you do lose your job, you could use the money to cover living expenses until you find another job.

Make a budget

Individuals cannot overlook the importance of making a budget before investing. To start investing, you should figure out how much you’re spending per month and how much you can save to pay down debt, invest, or contribute to your emergency fund. Begin by determining your monthly income, selecting a budgeting technique, and keeping track of your progress. Following that, the 50/30/20 rule, or a variant of it, is widely recommended to allocate 50 percent of your income to needs, 30 percent to wants, and 20 percent to debt repayment and savings.

Pay off debt first

Paying off debt first is crucial since when you start your investing journey, you’ll want to make sure you won’t sell because you’re having problems paying down your debt. Liquidity issues can force you to sell your investments as you run out of ways to repay your debt. However, if you budget correctly and manage your cash inflow and expenditures correctly, you might be able to handle a small amount of debt combined with investing.

As mentioned before, debt also plays a significant role in limiting the effect of compound interest. Compound interest also works the other way around, making it extremely important to pay off debt consistently.

If you are new to investing and have significant debt, Dave Ramsey’s snowball method for paying down debt might prove effective. According to Ramsey’s theory, you should start with listing your debts from small to large. After that, you’ll pay the minimum on all your debt except the smallest one. Then, you pay your smallest debt as much as possible and continue until you’ve paid off all your debt. While this process sounds relatively simple, it can be challenging to implement if you don’t know how to budget correctly.

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Starting your investment journey

Taking the costs and fees of investing into consideration

Depending on how much you invest, you will want to pay attention to structural fees, execution fees, percentage fees, or fees in general. When starting, fixed transaction fees hit you the hardest since you only invest small amounts. However, after a more extended period, when your wealth increases significantly, the price in percentage will dent your portfolio in terms of cost. Therefore, it’s essential to acknowledge the costs of investing at your broker. In addition, if you are planning to invest in baskets of stocks or ETFs, you must be aware of the TER. TER stands for Total Expense Ratio, creating clear insights around an ETF’s cost. Generally, experts recommend staying under .5% in fees annually, but some ETF TERs go as low as .06%.

Diversify a small portfolio

Diversifying investment portfolios used to be significantly more difficult. Mutual funds sometimes have high investment minimums or fees, typically requiring several thousand dollars to get in. In addition, diversifying your portfolio without a pooled investment was difficult because it required purchasing several individual equities and bonds.

In addition, if you’re new to investing and only have a modest amount of money to invest with, a mutual fund or ETF that gives broad market exposure can help you diversify. However, as mentioned before, you should be aware of the costs of a mutual fund as opposed to an ETF. When investing for the long-term, a 1 percent difference can result in hundreds of thousands less in retirement.

 

Remember that the precise investment you choose should fit your financial goals, time horizon, and risk tolerance. Consider a target-date fund to take the guesswork out of retirement planning. In your investment strategy journey, you’ll need to adapt your risk tolerance according to the factors mentioned above.

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79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Let’s talk about risk.

Company risk

When you invest in individual companies, you are subject to company risk. For example, you may lose money if you own stock in a firm that does not generate enough sales or earnings. In addition, bad news about the company, sector, or industry can significantly harm the investment you decided to commit to fully. However, buying individual companies can dramatically impact the returns you will receive but doesn’t offer any diversification in terms of company risk.

Volatility and market risk

Regardless of how well a company performs, its stock remains exposed to market volatility and risk. Like all other commodities, investors determine stock prices by supply and demand. As a result, stock prices will fall if investors remove funds from the stock market as a whole.

Market breakdowns are unavoidable, but history has demonstrated that they are only temporary. The idea here is to mentally prepare and build up your portfolio to prevent the most significant declines. You will never regain your losses if you sell while the market is down. Holding on during a downturn puts you in a position to profit when the market returns. Make sure you have a backup cash source to handle unforeseen costs in your investment portfolio.

You could also build a portfolio to lessen volatility. It’s essential to again mention that diversifying your investment portfolio can help. Defensive stocks and dividend payers are less volatile than growth equities. Investors with short time horizons should keep a portion of their assets in bonds or cash since these options have lower implied volatility. Still, you won’t be able to foresee the next economic downturn. However, a stock market sell-off will probably occur long before a recession. When that happens, remember the first lesson: A recovery eventually follows a recession.

Investors can use the dollar-cost averaging approach of investing to profit from a declining market. You already employ the strategy if you make regular monthly contributions to a qualified retirement plan. When the market begins to decline, the time to start dollar-cost-averaging in an investment account or increase your contributions starts.

 

Companies that manufacture fundamental necessities such as consumer staples and food will always be in demand, even during an economic slump because people need to prepare meals and clean, among other things. Discount stores frequently fare better during recessions because their main products are less expensive. Similarly, healthcare is in high demand.

 

Dividends serve several functions for investors. For starters, if a firm has a lengthy history of paying rising dividends, you can be confident that it is financially sound and can withstand most economic conditions. Second, dividends provide a return buffer. Even if share prices fall, you will still receive a return on your investment. Dividend companies tend to outperform non-dividend stocks during market downturns for these reasons.

 

Usually, companies with high-growth expectations tend to fall steeper in percentage and are replaced in recessions. Investors replace them because many high-growth companies that investors like to call growth stocks offer luxury products that consumers can easily cut from their budget. So when a recession hits, you’re much less likely to buy that new Tesla you always wanted. In addition, companies that offer subscription services are at risk since small subscriptions are often the first to get cancelled in a recession, causing significant dents in these companies’ revenue.

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Opportunity cost

The value of what you lose when you choose between two or more choices is known as opportunity cost. It is a fundamental principle in both investment and life in general. When investing, opportunity cost is the amount of money you might not gain if you bought one asset versus another. Opportunity cost is calculated by deducting the preferred investment from the alternative investment. In some cases, fear of missing out can play a massive factor in how you make investment decisions. For example, your friend could tell you that you could invest in crypto while having no other alternative. Always compare the different options you have and assess whether an investment is suitable for you at the time and decide for yourself.

Investments should be determined by your preferred level of risk and schedule for investing, which means that the shorter your time frame to invest, the more conservative the assets you seek should be. For example, investors tend to opt for government bonds for conventional options. At the same time, you can set yourself up for more significant returns for longer-term objectives by introducing higher percentages of riskier investments, like stocks and ETFs. In addition, some investments perform better over a specific timeframe.

Sometimes, feelings are difficult to control when investing, and certain biases or market swings can cause us investors to act on things we would have preferred to distance ourselves from. For example, many homeowners are thrilled with their investment over 30 years because they probably never really got it assessed for taxation since they started living there. Let’s say that over the years, your original purchase of $250,000 against 3.8 % has more than tripled over 30 years. I’m sure you’ll jump for joy. These investors weren’t lucky. They did not check the value of their investments often, which made them somewhat immune to making emotional decisions.

Why you should start investing as soon as possible

The sooner you start investing, the more likely you’ll end up with a significant amount in your retirement savings or whatever goal you have for your money. To help you understand the importance of starting early, we came up with a small example – Let’s say you invested $100 when you were 12, and you contributed $2.50 each month, against 8 percent annually. You’d have $33,279 when you’re 65. However, if you started at 18, you would have close to 35 percent less, which is a significant difference for a six-year difference. The power of compound interest is responsible for this situation, and even starting your investing journey one year sooner than later can boost your retirement fund by tens of thousands.

Buying expensive stocks

Some of us want to start investing in companies like Google or Tesla but can’t find the funds to buy stocks above $500. Many companies work to keep their options open in terms of stock splitting. Stock splitting lowers the price but subsequently increases shares, resulting in the same market value, except that you’re buying the share for a lower price. However, not all companies do stock splits, and you’ll have to invest in them through fractional shares. Some brokers offer fractional shares, so investing in high-priced companies becomes easier for the beginning investor.

Assume you want to invest in a firm, but its stock price is higher than you want to pay. Instead of purchasing an entire share, you can buy a fractional share, a “piece” of stock representing a portion of a share, for as little as $10. For example, if a company’s stock sells for $500 per share and you buy $100 worth of it, you would own 20 percent of that share.

How much should I be investing?

Generally, it would help if you strived to save 10 to 15 percent of your annual salary for retirement. Your employer match counts towards that goal. While this aim may be unrealistic right now, you may gradually build up to it. Building up towards this percentage will take budgeting, financial wisdom, and the habit of setting money aside.

Others even say you should strive to save 15-20 percent of your monthly income. Of course, you don’t have to invest all your savings, but putting 10 percent of your income towards your retirement goal is an excellent place to start. Long-term savings should be put in stocks, while investors should retain short-term funds in a bank account. The considerations in this article will determine your technique for determining how much to invest.

Opening your investment account

Answer a few questions about your investment goals before you start looking through online brokers. For example, do you want to buy a few specific stocks? Are you looking for a long-term retirement fund, or are you interested in day trading or more advanced investment strategies like options?

Once you know what you want and what’s important to you, it is now time to open an account. When looking for a broker to open an account with, pay attention to fee structure, spreads, and exchange costs. You may not be able to avoid account fees entirely, but you can reduce them. Most brokers will charge a fee to move investments or cash and close your account. If you switch to another broker, the new company may offer to reimburse your transfer expenses, at least up to a certain amount. As a new investor, it’s better to do your research correctly and choose a broker that suits you best.

Most additional costs can be avoided by either choosing a broker that does not charge them or opting out of services that do. As an investor, some fees to be aware of include annual fees, inactivity fees, trading platform subscriptions, and additional payments for research or data.

After finding the perfect broker, you can deposit funds and select your investments. Experts recommend not being too concerned about your initial deposit, but strive to increase the dollars to your account regularly.

As a novice investor, you can start with as little or as much money as you like. Additionally, tiny amounts of money invested at a steady rate that works for you might result in a substantial portfolio balance over time.

So how much do you need to invest?

While we recommend first paying off debt and to start budgeting to create a proper cushion for investing, the honest answer is that you don’t need much to start investing. But, to emphasize, the earlier you start, the better and keep in mind that small, consistent steps can build significant wealth over time. In addition, brokers are finding alternative ways to allow beginning investors to start investing with automatic investment plans, fractional shares, and thematic investing, lowering the bar for beginners.

Award-Winning Trading Brokers:

Trading beginner - Plus500
etoro
Trading beginner - IG

Rating:

(5/5)
5/5
(5/5)
5/5
(5/5)
5/5

Regulated By:

FCA, CySEC, ASIC, FMA, FSA, FSCA

CySEC (EU), FCA (UK), ASIC (Australia)

BaFin, FCA

Demo Account:

✔ Free

✔ Free

✔ Free

Live Account:

$100

$200

0

Spreads From:

Variable from 0.5 bps

Variable from 1.0 bps in EUR/USD

Variable from 0.4 bps

Selection Of Instruments:

2000+

1000+

17.000+ (FX, Stocks, CFDs, Commodities and more)

Support:

24/7

24/7

24/7

Payout:

1 – 3 Days

1 – 3 Days

1 – 3 Days

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

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