How to start investing in stocks with little money
Do you need much money to become an investor?
People often think that stock investing is available only to those having a substantial amount of money. While a couple of years back, this might have been true, today the investing environment is drastically changed. You are not required anymore to have tens of thousands of pounds to start investing in stocks and the minimum amount to invest in the share market can be as low as a couple of pounds or euros.
Most probably as a newbie investor, you would want to know exactly how much money you need to invest in shares. Well, the truth is that you can investing even if you have less than £50 available. So, it can be said with certainty that nowadays everyone, even individuals with little money, has the opportunity to start investing in stocks as long as they are willing to educate themselves about the investment process.
How do I get into investing in stocks?
Although some find it hard to believe, there are multiple ways you can start investing in stocks with little money. What's more, there is an option through which you are also able to benefit from investing in a diversified portfolio. Accordingly, with little money available for investing, you can start by investing in a fraction of stocks, mirror or social trading, invest in CFD, ETF or mutual funds (see below for explanations). Let's see the answer to the question about how to start investing in stocks with little money.
Maybe you are familiar with the term penny stocks, which are stocks that have a low price but for the reason that they are high risk. In the past, this type of stock may have been the only option for investing in stocks if you had little money. However, the development of the financial markets and the development of new services offered by brokers offer an opportunity for small investors to purchase a fraction of shares. Accordingly, you don't need to have £1,000 to buy one stock priced at £1,000 because brokers offer the possibility for you to buy a fraction of the one-thousand-pound share.
If you plan to invest your money in a diversified portfolio and reduce your exposure to only one or a few stocks, you can choose to invest in Exchange Traded Funds (ETF) or Mutual funds. ETFs are a type of financial assets tracking the performance of a group of stocks or other instruments. When you invest in stock ETFs, you basically invest in a basket of stocks, which means that you invest in a diversified portfolio. ETFs can be related to stocks in a specific industry or tracking the performance of an index.
Another option for diversification is the mutual funds, which collect money from small investors and invest that money in different stocks to create a well-diversified portfolio. Although ETFs and mutual funds may seem similar, there are some major differences. First, ETFs are traded on the market in the same manner as stocks and their price can fluctuate throughout the day. On the other hand, you can buy shares in mutual funds at the end of the day. Another difference is that mutual funds are actively managed, which means that the fund manager decides about the purchase and sale of stocks and the overall composition of the fund's portfolio of stocks.
Contracts for difference or CFD are another way you can benefit from stock price movements. Although this is a derivative instrument and in reality, you will not own the reference assets (such as stocks), you can make a higher profit because of the leverage offered by the broker. When trading CFD, you trade the difference between the contracts' open price and closing price. Hence, when trading CFD, you are trading on your expectations about the movement of the price of an underlying stock (or other assets) in the short run. Noteworthy mentioning is that the CFDs are commonly traded by more experienced traders.
Mirror trading is yet another way you can enter the stock market with little money and as a newbie with limited knowledge of the financial market. The process to trade stocks is rather straightforward because you will connect your trading account and your trading activities with the account of another trader. By doing so, whenever a trade is made by the trader, your trading account will automatically execute the same trading position. One issue requiring attention is the selection of an adequate trader to link your account with. An adequate trader or trading account would mean that the level of profitability, the risk level and the traded instruments are in accordance with your personal preferences.
You can also decide to put your money in the stock market through social trading. Social trading refers to the trading or investing process in which you are looking for strategies available on the social trading platforms. After you have identified an acceptable strategy in accordance with your trading criteria, you will open and close positions based on the selected strategy.
Other ways you can start investing in the stock market when you have little money is to use robo-advisors or some investment apps.
How to start investing in stocks with little money
Regardless of your chosen method for investing, you should know how to get into investing in stocks. The basic steps to invest in stocks are:
- Decide on the investment process
Will you execute the investment by yourself or you invest in a professionally managed portfolio (e.g. mutual funds)?
- Note that investing means that you will buy and hold the stocks for a more extended period while you can also trade stocks on shorter periods.
Hence, decide what you will do with your money: are you going to buy and hold shares or you will trade them regularly on a day to day basis or even execute intraday trades?
- Define an investment budget by checking how much money you have available for investing and decide on the amount of money you plan to invest.
But don't forget that you should invest only the money you can afford to lose. Also, you should decide if you want to start with the amount of money you have or whether you will wait until you save some more money.
- After going through the previous steps, what follows is for you to select the appropriate broker or financial institutions.
As you can see, there are multiple ways to invest or trade stocks with little money, which means that you need to open an account with a broker offering the financial services you need.
- Get acquainted with the investment platform and how the investment or trading process is executed.
This is best done by practising on a demo account.
- Define your investment strategies and the tools you will use in your investment analysis.
- Start investing and adapt your strategies.
- Collect profits, reinvest profits and build up your wealth.
Don’t rush to buy stocks just because the minimum amount to invest in the share market can be a couple of pounds or euros. Before investing, consider the costs associated, such as the brokers' fee. Keep in mind that usually you pay brokers' fees on each of your transactions when you buy stocks and this price should move at least by the amount of fees you have paid before you make any profits. Some brokers may charge a fixed per-transaction fee, or charge a percentage fee with a defined minimum fee.
Let's say that the selected broker will charge you a fixed £7 fee on your transaction. If you invest £100, the fee will be 7 per cent of your investment and your position will be profitable after the price increases by more than 7 per cent. On the other hand, if you wait until you save say £500 and invest them through the same broker, the transaction cost would be 1.4 per cent. You will see profits when the price increases by at least 1.4 per cent, which is by far a smaller rise required compared to 7 per cent. Of course, this doesn't mean that you should avoid investing in stocks with little money. Instead, it merely means that you need to pay attention to proper money management.