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Determining How Much to Invest in Stocks

M any investors wonder how much to invest in stocks when they’re first getting started. The exact answer will depend on stock prices, portfolio diversity goals, and trading fees but should also take into consideration what an individual investor can really risk.

Key takeaways:

  • There’s technically no minimum amount needed to start investing, but there are several factors you should consider to determine a budget for yourself.
  • When you’re figuring out how much to invest in stocks, you should consider minimum amounts needed for your investment of choice — as well as how much you personally should allocate for investing.

How Much Money Do You Need to Invest in Stocks?

Image via Unsplash by kmuza

If you’re wondering how much to invest in stocks, you’ll want to consider these two main questions:

  1. How much money do I need to invest in stocks? This question asks about the minimum amount anyone needs to get started.
  2. How much money SHOULD I be investing in stocks? This question, on the other hand, gets more at the amount of your personal savings you should devote to investing in the stock market.

Though these questions may sound similar, the answers may vary significantly based on your personal situation. The good news? There’s something just about anyone can do to get started.

Is There a Minimum Amount of Money Needed to Start Investing?

While there’s technically no minimum you need to get started, most beginning investors want to have at least in the range of $200 to $1,000. Since most brokerages don’t require minimum amounts to open an account and get started, you could theoretically even open an account with only $1.

However, a few factors set a natural minimum amount you should use to start investing. You can come up with the minimum amount you need based on a few different factors:

  • You should be able to afford one single share of the stock you want.
  • You’ll want enough money to diversify your portfolio properly.
  • You’ll want to be able to protect the profits you make from trading fees.

Minimum to Purchase a Single Share of Stock

How much money do you need to buy stocks? Well, that depends on the kind of stock you want to buy. You can find penny stocks trading for under $1.

First, do some research to figure out which stock (or maybe a handful of stocks) you’d ideally like to buy. Once you have a list of potential stocks, you can easily see how much money you’ll need to buy one share. This can be anywhere from $1 to prices in the hundreds of thousands.

If you find a stock you want to buy that costs more than you can afford right now, there’s often a solution. Some brokerage startups let investors buy fractional shares. So, if you want to buy a stock that has a stock price over $1,000 and you don’t have $1,000 to devote to investing right now, you might buy fractional shares for as low as $5 in that same company.

Minimum to Diversify Your Portfolio Properly

You’ll also want to try to buy enough stocks in different positions to diversify your portfolio properly. You want to stay away from putting all your funds into one single stock as that makes you overly concentrated. Your whole investment future is then tied to one position. Between 10 and 30 positions is a commonly recommended amount.

That said, you can start with just a few positions if you don’t have a ton of money to allocate to investing right now. That’s especially true if your goal is to keep adding more positions as you progress. You can buy one stock with the first sum you put in your investment account, then the next time you buy stock, go with a different stock. The time after that, buy a third stock. Over time, you’ll be able to diversify without using money you can’t afford all at once.

However, if you do have the flexibility to start investing with a larger sum, you can get started right away with a portfolio with 10 or more positions. No matter how much money you start with, you should aim to get some diversity as soon as you can.

Minimum to Protect Profits from Trading Fees

You’ll also need to consider trading fees when you’re setting a minimum amount you need to start investing. If you go in with a smaller amount, trading fees can cut into the profits you make.

Let’s say you start investing with only $100, buying one stock at that price. Right at the beginning, you pay a trading fee of $5. Then, your stock goes up by $10, so you sell it — and pay $5 in trading fees again. Your profit just got wiped out by trading fees.

Starting with more money from the outset helps avoid this problem. Let’s say you invest $5,000. $10 total in trading fees reduces your profits by a much smaller percentage.

Most bigger online brokers charge around $5 to $7 per trade, so you don’t have to be quite as picky if you’re starting out with more than $5,000 for investing. You can definitely still invest with (much) less than $5,000. You’ll just want to do some research to find brokers offering free trades.

How Much Money SHOULD You Invest in Stocks?

The second set of considerations should let you explore what you, as an individual investor, can reasonably put into stocks from your personal savings.

If you’re investing through funds, you can use a big portion of your portfolio toward stock funds. This is especially true if you have a long time horizon. However, think about two main guidelines when making a budget for how much you’ll invest in stocks:

  1. Don’t invest so much that you risk your financial future.
  2. Don’t invest money you’re going to need in the next five to 10 years.

Don’t Let Investing Risk Your Financial Future

Whether you’re able to start out with $100 or $1,000 or more, you should make sure you’re not taking outsize risks that could devastate your financial future. Getting to watch your money compounding in the market offers plenty of temptations, but don’t forget it’s not that uncommon for markets to drop by 50% or more in one year. If you’re making unwise decisions or simply run into bad luck, you can lose all your money on the market if you put everything you have there.

Bullish investors can make money on the market over time. Bearish investors can also make money on the market over time. But if you get greedy, impatient, or risk too much, you’re setting yourself up for trouble. If you’re investing so much of your savings that a big decline would destroy your financial future, you should rethink how much money you have in stocks at a given time.

Don’t Invest What You’re Going to Need in the Near Future

You don’t want to put money you’re going to need soon (think: five or 10 years) into the market, either. There are a few main reasons for this.

Markets Can Experience Significant Declines During a Downturn

If the market goes into a downturn in the next several years, it could significantly decrease the money you have available. If you put $20,000 into the market but plan to use $20,000 to buy a home in the next couple of years, you may have to either postpone your purchase if the market experiences a downturn, or take money out of the market at a very inopportune time.

If the market goes on to make a recovery, you can make back your losses and then some later on — but not if you’re forced to take out money that you need. You don’t want to buy high and then have to take out money at a market’s lowest point.

Markets May Be Poised to Offer Even Greater Returns — If You Can Hold Your Position

If you do great research and invest in a valuable stock that goes up and seems ready to keep rising, you want to stay in your position. If you need that cash right away, though, you’re going to wind up needing to sell your shares, missing out on potential gains in the future. At the same time, you might also realize a tax bill on capital gains earlier than you had planned.

Getting Started

A ll in all, the amount you need to buy an individual stock will depend on how expensive the shares for that stock are. Since share prices range from only a few dollars up into the thousands, you can get started investing on any budget.

You can also invest in mutual funds on a smaller budget by looking into exchange-traded funds, or ETFs. While mutual funds frequently have minimums around $1,000 and higher, ETFs trade as a stock would, so you can purchase ETFs for a share price that can be less than $100.

No matter how much money you start with today, the most important factor is how much you can add over time. Adding steadily as time goes on will help boost wealth over the long term.