Do you need a lot of money to trade stocks? Not at all. What you do need is some ground rules. Key among them are based on your age, goals and tolerance for risk.
But we’re getting ahead of ourselves. Before you start investing in the stock market – or anywhere else for that matter – let’s tackle some of the basics.
What’s the minimum I need to start investing in stocks?
Before you can start investing in the stock market, you’ll need to open a brokerage account, if you don’t have one already. As a brokerage account holder, you’ll be charged a fee or commission when you buy or sell stocks. Annual and quarterly fees may apply under a specified asset/trade level depending of account type
Fees are largely dependent on how often you trade. For instance, in the case of Scotia iTRADE, active investors pay $4.99 on both equity and options trading when they execute 150+ trades per quarter.
If you’re a new investor, you should know it’s not all about fees. Often you get what you pay for. In addition to low fees, explore the brokerage’s services, research and educational offerings, and trading platform.
Share prices for individual stocks can run from a few cents per share to thousands of dollars each. While there’s no minimum amount needed to start investing in stocks, you do need, at the very least, the cost of one share and the broker fee to cover your purchase.
Starting with a small amount of money is a good way to start investing in the stock market, but you won’t be able to take full advantage of diversification, a key investment strategy, with a limited selection of stocks.
An easy way to get “instant” diversification are Mutual Funds, or ETFs (Exchange Traded Funds). ETFs are comprised of different stocks just like mutual funds but investors buy them like stocks. There’s a growing range of ETFs available to match individual investment goals.
With that said, every investment and financial expert worth their salt will advise investors to take care of the fundamentals before opening an investment account or brokerage account. Practice good personal finance. Take care of an emergency fund. Make sure you’re comfortable with what’s in your savings account. And consider your retirement account, even if it may be decades in the future!
The bottom line is, the best investment is the one that’s right for you.
How much money should I invest in stocks?
The expression, Don’t put all of your eggs in one basket, may not have been written with the stock market in mind, but it effectively describes the process of diversification; a process which is useful when considering risk management.
New investors should know that asset allocation is one of the founding principles of good investment management. In its simplest form, asset allocation is about diversifying your portfolio of investments instead of relying on a small number of investments to do it all. In effect, you’ll be reducing the risk of losing money. When your portfolio includes a mix of stocks, bonds, cash and real estate, you’re effectively practicing asset allocation.
So what’s the right mix of assets for you? It depends on two key questions. Your time horizon and your tolerance to risk. Let’s break down these two individually.
- Your time horizon. How long are you willing to invest to achieve your financial goal? Months or years? Decades? Younger investors with longer time horizons can feel more comfortable with risk because they can wait out the volatility of the stock market. Their focus should be on capital appreciation. Conversely, older investors (especially those in retirement) will want less risky investments because their time horizon is shorter and, as they drawdown their investments, will have less time to ride out volatile periods. They typically concentrate more on investments that generate income.
- Your risk tolerance. If you’ve read anything about the markets, you know they offer their fair share of ups and downs. Your willingness to take on riskier investments for the potential of higher returns defines your “risk tolerance.” An investor with a tolerance for risk will be more comfortable with the potential of losing money on their investment in return for better potential results on their investments. On the other hand, investments that preserve the original capital investment are preferred by more conservative investors. Come up with an investment strategy that works for you. Are you a risk-averse, conservative investor, or are you going to be aggressively trying to beat the market?
Is there a relationship between risk and returns? You bet. Taking on more risk has the potential to deliver better returns. If you have a financial goal with a long time horizon, you're likely to earn more money by carefully investing in asset classes with greater risk, like stocks or bonds, rather than restricting your investments to assets with less volatility, like cash equivalents. On the other hand, investing solely in cash investments may be right for short-term financial goals.
It’s important to note that all investments include varying amounts of risk. Some, like stocks, experience more risk in the short-term. Even holding cash on a longer time frame can be “risky” because it may lose some of its value (known as purchasing power) in a higher inflation environment. Like every aspect of investing, it’s important to understand what you’re investing in and why.
Stocks, ETFs, & Mutual funds: What’s the difference?
When beginning your investing journey, it’s easier to conceptualize stocks, ETFs and mutual funds as different tools in your investing toolkit. Each ‘tool’ plays a different role in helping you achieve your investment goals.
With an individual stock, you have direct ownership in one business. In essence, you're buying a small part of that business. (A bond, which we won’t discuss here, is a loan offered by a business.)
One of the advantages of owning stocks is that you pay no management fees although there will be a trading fee for buying stocks. Since there’s no financial professional involved, it’s up to you to manage your stocks.
Buying individual stocks tends to be riskier than buying, say, a mutual fund. If the stock falls dramatically, you can lose a lot of money. That’s quite converse to a mutual fund, which may include hundreds of different companies, so the under-performance of a single stock will have minimum impact on the overall fund returns.
When you sell your stocks(or any of your other investment classes), you’ll be asked to pay capital gains on the increase in their value over and above what you paid for them.
A mutual fund will pool many different stocks – sometimes hundreds of them.
The key benefits of mutual funds? Diversification at a lower cost compared to purchasing stocks individually. Plus, investment decisions within the fund are made by professional fund managers.
The range of mutual funds is truly awe-inspiring – from money market funds and fixed income funds to equity funds and index funds, plus numerous specialty funds. Mutual funds do not trade on the stock market – you’ll have to purchase them through a financial institution or a certified financial advisor.
ETFs (Exchange Traded Funds)
The newer kid on the investment block, ETFs are similar to mutual funds but trade like stocks. As an owner of an ETF, you’ll want to pay attention to the basket of stocks within the fund and how many shares of the ETF are traded each day.
For large-cap Canadian and U.S. index ETFs, for example, management fees tend to range from 0.03% to 0.10% for the more widely followed products.
Mutual funds vs ETFs – The Similarities
- Comprised of baskets of investments which offer exposure to different markets, asset categories and investment strategies
- Help mitigate risk of investing in a handful of individual stocks
- Professionally managed, so they charge management fees
- Enable you to benefit from asset allocation through diversification
Mutual funds vs ETFs – The Differences
- ETFs charge lower management fees because they are an index fund, and not actively managed like mutual funds
- There can be differences between certain mutual funds and ETFs when it comes to tax efficiency (a little too complicated a topic to explore here)
- ETFs can be purchased on the stock market
What should be my investment time horizon if I’m investing in stocks?
An important aspect of trading or investing is to define your investment horizon. Your investment horizon may be a single period of time or a range of times based on the length of time with which you wish to hold a single investment or portfolio of investments, maintain a strategy or group of strategies or time until you reach your financial goals.
A well defined investment horizon will support your asset allocation targets and overall investment portfolio results.
Should your age affect how much you invest in stocks?
A new investor in their twenties should be investing very differently from someone nearing retirement. As noted above, their respective investment time horizons are on different ends of the spectrum.
Which brings us to asset allocation or equity allocation.
Investment experts recommend that we progressively reduce risk in our portfolios as we get older. After all, a retired investor doesn’t have the luxury of time to wait for their investments to climb back from a market downturn.
The younger you are, the longer your investing time horizon and, in theory, the more risk you can take on. You can afford to have a lot of individual stock in your portfolio.
For those in their 40s or 50s, stocks are still important but more stable investments like mutual funds and bonds begin to take an increasingly bigger role. Asset allocation is an important consideration in your investment plan, and one that will help you make informed investment decisions.
What’s the best investment? The one that’s right for you.
Whether you invest on your own with a brokerage firm, through a robo-advisor or with a financial advisor, it’s good to stay informed, disciplined and focused. Never lose sight of your long-term investment goals. After all, stock trading is only one part of saving for one’s retirement.
How frequently should I invest in the stock market?
Before you start to invest in the stock market, or determine how frequently you buy investments going forward, debt management and the establishment of an emergency fund are important considerations.
Many investors choose a consistent approach to investing. They create an investing schedule and stick to it. For example, investing schedules can be weekly, bi-weekly, or monthly.
As you consider your schedule, remember that you may be charged a fee whenever you buy or sell a stock or ETF. So if you’re on a tight budget, you may want to limit the frequency of your trades.
While the goal of every investor is to make money in the stock market, it’s critical to approach this goal in a methodical and disciplined way. Making money shouldn’t come at the expense of your peace of mind!