The logic goes: in order to make a lot of money, you need to start with a lot of money. Right? Well, not necessarily. In this article, we’re going to debunk that logic for you. To make money in the stock market, you do not need to start out with big money. You just need to start.
Costs to Making Trades
One of the most common misconceptions about investing is that your trading costs will outweigh your gains if you open a small portfolio. Many people remember the trading fees and account minimums of the past when they consider the costs of trading. These investors are not wrong: in the past, these costs may have been a real deterrent from opening a stock portfolio. Brokerages would charge both a flat fee and a percentage per share for each trade an investor made – say $30 plus 1.5% on each trade – which could add up quickly if investors bought large shares, or many shares. Further, many brokerages used to require account minimums, meaning that investors needed to maintain a certain amount of money in their accounts at all times to even start trading. So, much of the time, it was actually impossible to start small. However, in modern times, with modern technology, these trading fees and account minimums are much less substantial than they used to be.
Through the growth of popular investing, we have been given the ability to start small. Smaller per trade fees (think $3 as opposed to $30 plus a percentage of your shares) or monthly subscription trading rates make it easier, and less costly, to make as many trades as we would like. Further, the absence of account minimums means that investors can really start with as little as $5 in their accounts. Nevertheless, to this day, the misconception that trades are costly is one of the biggest factors that deters young people from investing. Realistically, your cost per trade should a minor worry in the grand scheme of your investing journey!
Fractions of Shares
But, even if my cost per trade is minimal, the shares are still expensive, right? While this claim has more merit, it is still not totally true. If you want to buy a share of Amazon, you would need to start with $1,000 – a pretty hefty share price for a beginner. Accordingly, if you wanted to begin investing with a smaller account, you would not be able to purchase a stock like Amazon and you would be limited to what stocks you could and could not buy, right? Not technically. While it is true that you would need $1,000 to buy a full share of Amazon, there is no reason why you could not buy a fraction of a share! Essentially, you put in as much money as you are willing to invest, and you own that percentage of the share. So, if you wanted to put in $200 instead of the full $1,000, you would own 20% of a share of Amazon. Then, your profits would be the percentage increases in your portion of the share. Hypothetically, if Amazon was trading at $1,100 tomorrow, you would have made 20% (the percentage you own) of that price increase – or $20 of the $100 price increase. This means that your trading can be perfectly scaled for the amount of money you want to start with, and your percentage of profit will be exactly the same whether you start big or small!
Don’t Forget About Compounding!
Finally, remember the power of compounding! Even if you start small, your money will grow on itself over time. If you want to brush up a little bit on your knowledge of compounding, you can check out another article from The Drive, here. The biggest take-away is this: if you start earlier, your money will have more time to grow. This means, while you may not make big money right off the bat, you could end up with more money in the long run compared to an investor who starts later!
So, how much money do you really need to start investing? The answer is different for each person, but we hope that this article has helped to debunk the misconception that it is harder to start small. From $5 to $5,000 and beyond, the truth is this: earlier you invest, the better off you could be!