How to Invest in Shares With Little Money
By Dale Gillham |
Investing in shares may seem like an activity reserved for those with deep pockets, but the truth is, that small investors with little money can also seize the opportunity to invest in the stock market. In today's digital era, there are some tools and platforms that have made it easier for individuals with limited funds to begin their investment journey.
The purpose of this guide is to help you understand how you can invest in shares with little money and the strategies that will enable you to achieve this. By following the right approach, you can gradually grow your wealth, even with a modest initial investment.
Whether you're a student, a young professional, or someone who's always been curious about investing in shares, this guide is designed to help you take your first steps toward building a diversified investment portfolio. Remember, it's not about how much you start with; it's your commitment to learning and making disciplined investment decisions over time that leads to long-term wealth.
Investing in shares with little money
Unfortunately, many of us face similar challenges given that the cost of living is rising, while wages remain stagnant, which means it is becoming increasingly difficult to save money. This can make it challenging to get into the stock market, especially for those with very little money.
But you may be surprised to learn that investing in shares for beginners is the perfect strategy for anyone with very little money to grow and compound their capital to achieve their financial goals.
Picture being able to make a 10 per cent return on your money each year - what would it mean to you and how would this change your life? Now imagine you achieved a 15 per cent return per annum, how would that make you feel?
Did you know that if you saved just $1 a month over 20 years and achieved a 15 per cent compounded return each year, your money would grow by well over 3,000 per cent? By understanding the power of compounding, it is possible to reach your financial goals much sooner, particularly when you invest in shares with the right knowledge.
Regardless of whether your goal is to supplement your income, save a deposit to buy a house, get out of debt, save money for retirement or travel – investing in the stock market offers endless possibilities.
Can I start trading with $100?
Yes, you can start trading with $100, but you need to be aware that you will also pay brokerage on the stocks you buy and sell, which will eat into your profits. That's why I believe a better strategy for getting started is to create a budget and allocate a certain amount of money into a savings account each month to build up your capital. That way you'll be able to generate sufficient money to start investing in shares, without it impacting on the profits you make.
While you are accumulating your savings, you can invest time in gaining the knowledge to be confident and competent to invest in the market. My latest award-winning book, Accelerate Your Wealth, It’s Your Money, Your Choice provides you with a proven, low-risk approach to investing directly in the share market using some simple but powerful investment strategies. I guarantee that if you read my book, you will gain the confidence and know-how to achieve very rewarding returns.
How much should you invest in stocks the first time?
As I previously mentioned, because of the brokerage costs incurred each time you buy and sell shares, the minimum investment you should place in each stock is $1,000. Let me explain...
If it costs $20 in brokerage to enter a trade of $1,000, the stock needs to rise by at least 4 per cent or $40 to break even on your investment because you will also pay brokerage to exit the trade.
What would be the outcome if you only invested $500? The stock would need to rise by at least 8 per cent to break even, which, as you can see, erodes the profits you take from the market. Imagine if you only invested $100 in a stock. It's for this reason that I don’t recommend investing less than $1,000 in each trade.
Unfortunately, many believe because they do not have much money to invest, they need to trade speculative or highly leveraged markets, such as Forex, to gain a good return. But believe me when I say, this couldn’t be further from the truth.
That's because without the right knowledge and skill to trade these markets, you'll likely lose your money very quickly, as many have experienced who have gone done this path. It's far less risky and more profitable to invest in highly liquid blue-chip shares when you first start trading, which you can achieve by investing in individual stocks within the top 20 on the stock exchange.
Let me say that in the early stages of your trading journey, it is not how much you invest or the returns you achieve that is important. What is critical is that you develop the right habits of a successful trader, so that you can protect your capital and compound your returns.
How do I diversify my portfolio with little money?
While it is true that diversification reduces risk, a portfolio of shares that is over-diversified (for example, more than 12 stocks) is exposed almost exclusively to market risk, which cannot be eliminated by diversification. Let me explain.
An investor who chooses to invest in a particular market is exposed to the risks inherent in that market, such as the economic influences of inflation and interest rates that affect the market as a whole. However, an investor must also contend with specific risk, which refers to the risks inherent in a company or particular events in a sector that influence specific securities. The total risk, therefore, is the sum of the market risk and the specific risk of the individual positions.
The specific risk is very high if an investor concentrates on only one security, but the more a portfolio is diversified, the less the specified risk. A stock from a different economic sector contributes more than a stock from the same sector because it is unlikely that all sectors will perform the same over time. For example, if one of the major banks is performing poorly, all the banks will likely be performing poorly because they are subject to the same economic conditions.
That's why individual investors can achieve maximum diversification while minimising their risk by holding between 5 and 12 stocks in their portfolio.
How do I manage my risk with little money?
Once you buy your first stock, you want to repeat the process, which means sticking to your savings plan until you have sufficient funds to invest another $1,000 in a blue-chip stock. For example, if you put aside $250 a month, then every four months you would save $1,000 to purchase another stock and you would continue repeating this process until you have at least five stocks in your portfolio.
Once you hold five positions, you have two choices. You can either start increasing the amount of shares you hold in each of the five positions or you can continue buying new stocks until you hold between 8 and 12. Increasing the position size in your existing stocks and/or holding no more than 12 stocks will enable you to manage both the market risk and specific risk, so you create a well-diversified portfolio.
Successful tips for long-term success in share investing
Achieving long-term success in share investing requires patience, discipline, and a commitment to continuous learning. Let’s look at some of the strategies that will help you navigate the world of share investing to maximise your potential for long-term growth:
1. Set clear financial goals
You need to establish realistic financial goals to guide your investment decisions. This will help you maintain focus and ensure your investment strategies align with your objectives.
2. Get educated
I cannot stress this point enough. If you want to be successful long-term, you need to continuously expand your knowledge about investing and financial markets. Enrolling in a trading course will significantly improve your understanding of how to profitably trade the stock market.
3. Develop a trading plan
When we invest in shares, we want to do so with the highest probability of success. With this in mind, and knowing that as humans we can become very emotional, you need to develop a set of rules that are measurable, logical and most importantly repeatable.
The rules have to be consistent in their application rather than subjective. The more subjectivity, the more our emotions play with our decisions and consequently affect the outcome. A solid trading plan, however, will help overcome this subjectivity and will work for you if you work it.
And you must use a trading plan every time you trade.
4. Diversify your portfolio
As discussed earlier, diversifying your portfolio across various sectors is critical to managing risk and compounding your returns. Regularly review and adjust your portfolio to maintain the desired diversification level.
5. Avoid emotional investing
Emotions can cloud your judgment and lead to poor investment decisions. You must stay disciplined and adhere to your trading plan, even during periods of market volatility. Avoid the temptation to chase short-term gains.
6. Monitor and adjust your portfolio
You need to regularly review your portfolio to ensure it remains aligned with your financial goals and tolerance to risk. You will also need to make adjustments to your portfolio based on market conditions and how the stock unfolds after you purchase it.
7. Be patient and consistent
Investing is a long-term endeavour, and achieving success often requires patience and persistence. Maintain a long-term perspective, and focus on the gradual accumulation of wealth rather than chasing quick profits.
8. Learn from your mistakes
Everyone makes mistakes when investing. The key is to learn from these experiences and use them to refine your strategies and decision-making process.
By following these tips and maintaining a disciplined, well-informed approach to investing, you can maximise your potential for long-term success, regardless of the size of your initial investment.
Embrace the journey of investing with little money
Investing with little money may seem daunting at first, but it's possible to build wealth over time through patience, discipline, and a commitment to learning. By setting clear financial goals, developing a trading plan and diversifying your portfolio, you can gradually grow your investments and achieve long-term financial success.
That said, the fear of making costly mistakes and the risk of losing money is what forces many to steer clear of the stock market altogether. But did you know that gaining the right knowledge and skill will help you to overcome your anxieties around risk and fear?
Gaining the right knowledge about how to invest in shares safely and confidently means you’ll experience far less stress and fear, and consequently take fewer risks with your money. And the earlier you start gaining the knowledge, the better off you will be, as your investments will compound over time the sooner you start investing in shares.
Remember that success in investing is a journey rather than a destination. Don't let limited funds discourage you from starting your investment journey. It’s just a matter of gaining the understanding needed to work out a strategy that suits your budget. Embrace the challenges and opportunities that come with investing with little money, and maintain a long-term perspective.
With persistence and informed decision-making, you can turn small investments into meaningful wealth over time, ultimately reaching your financial goals and enjoying the rewards of your hard work and dedication.
To get started, I recommend watching our live Stock Market Show, which is aired every Tuesday night from 7-8 pm on Youtube. Remember, a journey starts with a single step, so decide today to get started on your journey.
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