How Much Should You Invest in Stocks First Time?
By Dale Gillham |
This is a great question and one many beginners starting out tend to ask. But the real question that needs to be asked in regards to the amount you should invest in stocks for the first time is how much can you afford not to lose.
I say this because those new to the stock market are still developing their trading strategy and confidence when it comes to learning how to consistently make money in the stock market.
That’s why it’s wise to be aware of the costs in trading to ensure the odds are stacked in your favour. Given this, an important consideration when deciding how much to invest the first time is the amount of brokerage you will pay when buying and selling a stock.
Let’s look at an example.
If you decide to invest $200 and it costs $15 to enter and exit a trade, the stock needs to rise by 15 per cent or $30 just to break even. As you can, this tends to diminish the profits you take from the market.
That’s why I recommend that the minimum investment you should place in each trade is $1,000. If you paid brokerage of $15 to enter a trade valued at $1,000, the stock would need to rise 3 per cent to break even because you will also pay brokerage to exit the trade.
This is much more realistic and very achievable, as most blue-chip stocks that are trading in an uptrend will rise a minimum of 20 per cent in price over 12 months.
I can hear some of you saying ‘But I don’t have $1,000 to invest in a stock’. If this is you, then I encourage you to set up a savings plan to build up your capital. As you are accumulating your savings, you can invest time in gaining the knowledge and skills to improve your trading.
Remember, the stock market will always be there, but you may not if you lose your capital.
Trading speculative and leveraged markets
I feel like I would be doing you a disservice if I didn’t briefly touch on the topic of beginners trading speculative and highly leveraged markets.
Unfortunately, it has become all too common for those who don’t have much money to invest in stocks to consider trading speculative or highly leveraged markets, such as Forex in the hope of achieving higher returns than if they trade stocks. Sadly, as many have come to discover, this couldn’t be further from the truth.
That's because trading Forex without the right knowledge and skill is like gambling at the roulette table – the chances of you being successful over the long term are very short lived. The reason for this is that you are trading against professionals whose job is to take your money.
While the perception in these markets is that you will make a lot of money in a very short period, the opposite is typically what most experience. That’s why in the early stages of your trading journey, you shouldn’t focus on how much you invest or the returns you achieve. What is critical is that you gain the knowledge to develop the right habits of a successful trader, so that you can protect your capital and compound your returns.