Chances are that if you are asking this question, ‘how much money do I need to invest in the share market’, you are new to the share trading game. This is a very good question that needs asking. Why?
There are numerous unscrupulous individuals out there that want your hard earned money. For proof, go to any of the popular investment seminars and listen to how large of an investment they want. Some are asking for tens of thousands of dollars. What is the truth? How much do you need to invest? How much should you invest directly in the market, and what other costs should be factored in?
The minimum required to invest in a parcel of share in Australia is $500 however this is not advised as brokerage costs and transaction fees can eat into your capital.
How Much Will I Spend in Transaction Fees?
First we need to find out brokerage costs, and then a good starting amount of capital.
- Live person broker with phone-in orders
- Online trading through local bank system
- Online discount brokerages
Brokerage fees will vary. Having a real person broker make your trades will be quite costly. You might pay upwards of 100 dollars or more for such a service. Making orders over the Internet has become a very low cost way to trade. Of course these numbers will vary too. Local banks will typically charge much more than specialised discount brokerages. The more transactions per quarter will reduce the ‘per trade’ fees they will charge. Some discount brokerages will provide equity and options trades for around 10 to 14 dollars even if you are not a frequent trader.
Many of the online stock market trading firms do not even require an initial deposit. So in theory you could start trading with 10 dollars for the transaction and one cent for a single share. Of course the share price would need to rise 1,000 times for you to break even so this would make little sense. How much should you invest to start off with?
How Much Money Should I Invest?
Again, there is no magic number that all people should adhere to. But here is a popular recommendation made by many wise investors to be considered first:
- Do not trade money you cannot afford to lose
Share trading and derivatives are much more risky than interest earned at the bank. Money invested in the stock market should be particularly ear-marked for high risk investments. Some recommend a small portion of your savings to be put in the higher risk department to the tune of 5 to 10 percent. This means if you have 10,000 saved
consider trading 500 to 1,000 dollars of that money.
If you have less than 10,000 dollars in savings you might want to seriously consider if now is the right time to put money in a higher risk vehicle. The choice is your but remember that you don’t want to risk money that you will need for next month’s rent or for next year’s tuition fees.
What Can I do with 500 dollars?
To be sure, 500 dollars is a very small sum of money to invest with. The outright purchase of shares might give very little yield this amount of capital. Still, 500 dollars every year into some choice stocks could pay off in time provided the proper homework is done first.
There are other ways to stretch the 500 dollars much further than simply buying shares. For instance, you can invest in Contracts For Difference, or CFD’s. These can give you up to 20 times the leverage effectively providing you with 10,000 dollars worth of action. But before you run out to trade CFD’s, also know that leverage works both ways and you may quickly be out 500 dollars in a day or two of trading. You will be required to satisfy margin requirements with CFD’s.
Options are another way to trade small amounts of money for a highly leveraged opportunity. Options are not purchased on margin. You can buy an options contract for a very small amount of money without the risk of losing more than your purchase price. Of course, options are a huge market that requires a lot of skill and knowledge to execute properly and also have an expiry date.
The FOREX is another choice that allows you to trade currency pairs. For beginners I would shy away from this until you have learned much more on technical analysis and other trading skills.
So One Last Time, “How Much Money Do I Need to Invest in the Share Market?”
This can be done for a very small amount of money, the minimum is $500. However it is recommended that once you have saved up enough money to have some capital allocated for higher risk, you can profitably trade a small sum of 500 dollars. Highly leveraged options and CFD’s are some good choices when using small amounts of capital and will allow for a few well placed trades.
That being said, perhaps one or two hundred dollars could first be set aside to visit your local bookstore as you learn about technical analysis, options, CFD’s, and stock screening. Better yet, invest your time with a website like this one and you will know how much money you need to invest as well as which investments are most likely to turn a profit.