How much money do you need to invest in stocks?
You can start investing in the stock market with as little as $1. Fractional shares allow you to share the cost of investing with other investors. However, you will want to invest a minimum of 10 to 15% of your salary to start building wealth.
Imagine, starting your investment journey with only a few dollars. You can have access to some of the best companies on the stock market at minimal cost.
The most important thing about investing is that you just get started.
Luckily for you, I’m going to show you how to start investing with little money. I’ll show you what an investor should start investing in and how much you should start investing. At the end of this article, you’ll have an understanding of what it takes to become an investor.
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How much money do you need to invest in stocks?
You can start investing with as little as $1 if you are with the right brokerage. Some brokerages allow the purchase of fractional shares where you don’t buy a full share of a company. Instead, you are splitting the cost of the share with multiple investors.
For example, let’s assume you want to purchase a company with a share price of $100 per share. You only have $5 to invest and can’t purchase the share yourself.
Prior to fractional shares, you couldn’t invest in the company because you didn’t have the money for it. Now, you can own 5/100 of 1 share instead of owning the entire share outright.
Your brokerage account takes care of all the technical details. Pablo might have $10 to invest and Stacy might have $85. All together, the three of you have enough money to buy one full share.
In other words, you own 5/100 of the share, Pablo owns 10/100, and Stacy owns 85/100.
Click to Tweet! Please Share!Click To TweetHow can I start investing with little money?
To start investing with little money, start by opening a brokerage account or utilize your 401k. Set aside a portion of your income and consistently invest in low risk funds. Try to gradually increase the amount of money you are setting aside for investing.
As you can imagine, you first need to open a brokerage account. Your brokerage account is going to be your connection to the stock market. The brokerage will execute your trades and buy the shares on your behalf.
If you have a little money to invest, then you might want to consider a brokerage that allows fractional shares. Doing so will allow you to always have the ability to invest in high quality stocks or funds when you don’t have the full amount.
For example, Robinhood is one brokerage that will allow you to purchase fractional shares.
You will also need to determine which funds or stocks are you going to invest in. My recommendation is for beginners to start with low cost exchange traded funds.
Low-cost exchange-traded funds are often well-diversified. You gain access to hundreds of stocks at one low price which is perfect when you don’t have a lot of money. Your portfolio won’t be dependent on the performance of one individual company.
Personally, I like to look at Vanguard’s exchange-traded funds list. In my opinion, Vanguard has some of the best exchange-traded funds around at very reasonable expense ratios.
Once you know which ones you’re going to invest in, determine how much you can set aside every month. Your goal right now is to set up consistent investing habits. The more consistent you are with investing, the more successful you can be.
You may only be able to set aside $50 every month right now. Invest in what’s within your power and gradually try to increase your contributions.
What should a beginner invest in?
Most investors should start by investing in the low-cost S&P 500 Index Fund. The S&P 500 is a relatively safe Index Fund where you gain access to the United States top 500 companies. The fund is ideal because it is well diversified and has a historical annualized return on investment of 10%.
However, you need to be aware that not all S&P 500 exchange traded funds are created equal. The major difference is the expense ratio charged by the individual ETF managers.
For example, you might be able to find an S&P 500 ETF with an expense ratio of 0.03% through Vanguard. However, you can also find an S&P 500 ETF with an expense ratio over 1% through other fund managers.
Over the course of time, you’re going to pay a lot more in fees if you choose a high expense ratio. Therefore, I recommend VOO as the Vanguard S&P 500 ETF because of it’s low expense ratio.
How much should you invest in stocks?
Investors should aim to invest a minimum of 10 to 15% of your salary. True wealth builders will aim to invest up to 40% of their salary, which isn’t always obtainable. Make a plan for your future and estimate your required salary in retirement and assume a 4% withdrawal rate.
The first thing you need to do is start by understanding your life in retirement. You need to estimate the salary you want to live on. Will you be an active traveler who needs $60,000 per year or can you live on $40,000 per year?
From there, you can estimate how much money you need invested to retire. We will use the 4% withdrawal rule for our estimation. The 4% rule assumes you can withdraw 4% of your portfolio balance every year in retirement.
Someone wanting $40k in retirement would need $1,000,000 invested ($40k divided by 0.04). Alternatively, someone wanting $60k would need $1.5M.
Now, you can use a retirement calculator to estimate your monthly contributions.
For example, a 25 year old wants to retire by 60 and needs $1M invested. Assuming an 8% ROI, he needs to contribute $450 per month.
The sooner you start investing and the less money you need, the easier it will be. It will be hard for a 40 year old to invest enough to retire on a $120k salary when starting from nothing.
Click to Tweet! Please Share!Click To TweetSummary: How much money do you need to invest in stocks?
As you can see, you don’t need a lot of money to start investing in stocks. You only need around $1 to start investing with fractional shares. However, you will want to increase your monthly contributions and get serious about investing.
The first thing you need to do is open a brokerage account and start developing habits towards investing. Beginners should start investing in a low-cost Index Fund like the S&P 500. As you gain experience, you can diversify your portfolio even further.
Ideally, you are able to invest a minimum of 10 to 15% of your salary. However, you should always try to invest more money and you should have a plan for retirement.
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TightFist Finance
John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.
