The stock market has always been one of the most renowned methods to exponentially grow your finances. This is especially true during the tumultuousness that COVID-19 has brought, as share prices are at the lowest they’ve been in over a decade.
But, many people who ask themselves ‘how much money do I need to start investing’ don’t know how to answer the question.
Not sure where to start? Don’t worry, we’ve got you covered.
Let’s take a look at everything you need to know.
So… How Much Money Do I Need to Start Investing?
The answer to this question is highly variable based upon a handful of factors. It’s possible, though, to begin investing with only a small amount of money (such as $10-$20).
Let’s explore what can influence how much money you should have before you dive in.
How Much Do You Have in Savings?
While it can be tempting to place a large sum of money into the stock market, it’s not a wise idea if you don’t have a significant amount already in your savings account.
In general, it’s recommended you have enough money to cover at least six months’ worth of expenses before you start allocating funds to your investment portfolio. Otherwise, you run the risk of encountering financial hardship if things don’t go your way.
Put simply, the more money you have in savings, the more flexibility you’ll have when investing. Those with very little in their emergency fund should be particularly frugal when deciding how much to invest.
How Much Risk Are You Willing to Take?
If you’re in a position where losing a large amount of money on the stock market won’t affect your lifestyle, you’ll find you can take a significant amount of risk when it comes to investing. If you having your investment disappear overnight would bring instability, though, it’s best to minimize your risk.
For example, someone who has a significant amount of disposable income might want to capitalize on high-risk, high-reward stocks. In the event that they pay off, you’ll see an exponential amount of return. If you lose money, you likely won’t feel your losses too hard.
What Kind of Return Are You Looking For?
Investors who are looking for a particularly high return from their contribution will need more money to start with. This is especially true if they want to diversify their investment portfolio with a variety of low-risk, low-reward stocks. Contributing a small amount to this type of stock may yield returns that are negligible at best.
If you don’t mind the uncertainty involved, the aforementioned high-risk, high-reward stocks are a great option for those who only want to contribute a small amount of money, as the payoff will be far greater.
How Knowledgeable Are You of Market Trends?
Those who don’t have a thorough understanding of the stock market should contribute less than someone who’s more experienced. Even if you’ve never invested money on your own before, having a background in finance, knowledge of major companies’ performance, etc. will give you a significant advantage of a true beginner.
The most important skill, though, is the capability to recognize market trends. Fortunately, this is something that doesn’t always require professional experience and can be learned with a fair amount of independent research.
How to Get Started in Investing
Regardless of how much money you’re willing to put into stocks, there’s a commonality between beginners— they’re willing to put a percentage of their savings into the market. The exact value of this number is arbitrary and varies highly from person to person.
For example, it’s not unlikely that someone who has $20,000 saved up would be willing to contribute 5% ($1,000) of this amount to their investment portfolio. The same can likely be said for someone who has $100,000 in savings.
For those with no investing experience who are looking to get started, your best bet is to focus on reliable stocks that exhibit slow, long-term growth. While there’s nothing too exciting about checking on their performance, the lack of volatility will provide far more reliable results.
It’s far better to invest a small amount in a large handful of reliable stocks than it is to gamble on two or three stocks that may provide unpredictable results.
As your stocks continue to grow, take this time to learn all that you can about companies you’re interested in (and the market in general). Then, you can slowly start investing in riskier stocks as you begin to develop an eye for trends or have an expectation that certain stocks will perform well during certain quarters of the coming year.
Put simply, how much money you should invest is as much as you’re comfortable with. Keep in mind, though, that you should never invest money that you aren’t willing to lose unless your portfolio is highly diversified with low-risk stocks.
It’s important to note, though, that for those looking for slow, long-term growth, more money will equal higher returns. So, keep this in mind when deciding how much of your available finances to invest.
Getting Started With Investing Can Seem Difficult
But it doesn’t have to be.
With the above information about ‘how much money do I need to start investing’ in mind, you’ll be well on your way toward getting the most out of your finances.
Not sure where to invest during the COVID-19 pandemic? This article has plenty of useful information.