In the past, the stock market was perceived as a tool that was only for the extremely wealthy. Fortunately, popular online brokerages have changed that image. People with a more limited income or savings make up a larger portion of the securities market now — it’s become truly accessible.
But some still think that you need to make a sizable investment when you first enter the stock market. While it’s true that your first deposit should be meaningful, that doesn’t mean it has to be enormous. The right amount to get started in stocks differs from person to person.
Whether you’re on a limited income or have plenty of cash to spare, here are five things to consider when deciding how much to invest on your first foray into the stock market.
How Much Should a Beginner Invest?
Answer After Addressing Debt and Savings First!
Knowing how much you should start investing in the stock market is dependent on first taking care of your outstanding debts and setting up a financial nest egg. Before opening a brokerage account, pay down as many high-interest debts as you can and set aside an untouchable amount of cash in a savings account.
High-interest rate debts typically include credit cards and personal loans. Experts’ opinions on what constitutes a “high” rate vary, but many agree that it’s an outstanding debt with an interest rate higher than a student loan or a mortgage — around 2% to 6%. Some say anything with a double-digit percentage qualifies. Still others use the S&P 500’s annual return percentage as a benchmark: If the S&P 500 returns 7.3% on annual investments, then all debts with interest rates higher than 7.3% should be paid down first.
It’s also important to have an emergency fund in place. This consists of cash set aside for unexpected expenses: Medical issues, vital repairs, accidents, or any event that could result in a substantial cash payment. Having three to six months of regular expenses reserved in this emergency fund is a good idea, and it should be kept in an interest-bearing savings account — that way, it’s federally insured and will earn a little bit of passive income on top.
Enough for at Least One Single Share
Let’s address the question of how much a beginner should invest in the stock market by discussing each element a stock portfolio should contain, step by step.
The primary unit of the stock market is a share. A share represents your stake of ownership in a company. Share prices, as you’re undoubtedly aware, can range all over the map. For example, as of this writing, a single share of Kroger Foods costs a little over $32, while a single share of Amazon costs nearly $3,200. Logically, you should start with at least enough to buy a single share.
It’s also possible to buy a fraction of a share in a company. Many online brokerages allow you to buy in on stocks for companies at less than their single-share price. For example, as of this writing, a single share of Netflix costs $522.86. But you can purchase one-tenth of a Netflix share for $52.29 or a quarter share for $130.72.
There’s no real reason why you shouldn’t buy fractional shares in stock unless you prefer dealing with whole numbers or like to keep your records as simple as possible. But when you’re starting, it’s good to have an absolute minimum of the price of a single stock share.
Enough for a Diverse Portfolio
So you’ve bought a single stock share in a single company. You’re on your way. But you’re just beginning.
Every stock investment professional in the world recommends diversifying your portfolio. This simply means owning a variety of stocks — or “positions” — in several different companies.
Tying all of your stock investment capital to a single business, even one that’s consistently profitable, is a substantial risk. When you stake 100% of your investment funds in just one source, you’re entirely dependent on the fortunes and falls of just one company. If they hit a road bump and face a drastic decline in value, so does your investment portfolio.
Having multiple positions with different companies spreads your risk and protects you from substantial losses. If you have positions in 15 different companies and one of them has a terrible quarter, you have 14 other more stable or profitable positions to soften the blow of the losses of that one company.
A diverse portfolio also means having positions in different industries or business sectors. This acts as a hedge against industry-wide downturns. For example, in 2008, the real estate industry suffered through a massive recession. Those with stock portfolios made of only real estate stocks endured huge overall declines in value. But portfolios that had healthcare, information tech, consumer goods, energy, and other blends of companies likely experienced fewer losses overall.
Most stock market professionals advise having at least 10 different positions in your portfolio. Some suggest as many as 25 or 30. There’s no real maximum beyond what you can keep up with. You can also invest in exchange-traded funds (ETFs), which are quick ways to invest in a vast range of companies in a single share.
You don’t have to start with 10 distinct positions in your portfolio, although there’s no real reason you shouldn’t. But even if you just get one or two stocks in the beginning, adopt a diversification mindset — make it a goal to invest in different companies and sectors as you go.
Are Penny Stocks Worth It?
Budgeting a certain amount of income to go towards stock investments is wise, but it’s arguably less important than deciding exactly where the money will go…what stocks will you invest in?
This is a key question because, in reality, you don’t need that much money to get involved in the stock market. Most online brokerages allow you to open an investment account for as little as $1, with no ongoing minimum balance requirement. They usually don’t charge you to make a transaction, either. Commission fees are minor, which means it’s easy to buy stock in several kinds of companies to diversify your portfolio.
Several securities, commonly known as “penny stocks,” are priced at less than $5 a share. A few are available for less than a dollar. These kinds of stocks are almost always attached to relatively new, very small companies that are yet to command a huge amount of market share. They’re looking for as much capital investment as they can get, so they offer shares to the public for extremely low prices.
While the price of penny stock shares certainly looks appealing to someone just starting in the stock market, the companies that offer them are usually highly volatile. Very few break out to become hugely successful companies, and determining which ones are most likely to do that requires intense research and a lot of speculation.
Successful stock market players usually have at least some percentage of their overall investments set aside for these high-risk stocks. They can, after all, generate profit, especially if one gets into the field of day-trading (definitely not something a beginning investor should get into). But most don’t purchase penny stocks in place of more stable and reliably profitable stocks.
So although you can enter the stock market for as little as 41 cents a share, it’s likely not a meaningful investment.
Enough to Increase Your Chances, But to Stay Safe
The wonderful thing about the stock market is that people from all walks of life and different financial situations can enter into it relatively easily and cheaply. The stock exchange doesn’t care how much income you make, where you live, or how experienced you are.
So the definitive answer to the question “How much should a beginner invest in the stock market?” is largely contingent on how much you can afford. Starting with $2,000 is great if you can manage it. But if you can’t afford to start with more than $100 or even $50, that’s fine, too. Fortunes have been made by people who started with less.
Keep a few factors in mind when considering your initial investment into the stock market:
- Your first investment won’t be your last. The stock market is essentially a savings account vehicle. Your investment strategy should treat it as such — whenever you can, you’ll be adding funds to it in whatever amounts you can afford. So don’t feel pressure to make a super-huge investment your first time…just put in enough to get a meaningful portfolio started.
- Don’t invest money you’ll need in the next 5 to 10 years. Stocks are long-term investments, but a major market disruption could cause losses. Don’t invest money that you’ll need for the various expenses you’ll incur over the next 5 to 10 years. Keep those funds safe in a more reliable manner.
- Plan for a 50% tumble in value. The stock market has grown dependably and regularly over its entire existence — but there have been occasional drop-offs, declines, and severe value losses mixed into that history as well. Professionals suggesting investing only as much that you can stomach if a sudden, 50% drop in value happens. For example, if you start with an investment of $500, be comfortable with the notion that its value could drop to $250 after a stock market event. Such declines are relatively rare and the stock market has always recovered, but it’s never a bad idea to prepare for the worst.