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How To Invest In Stocks With Little Money?

Raymond Zhou

How To Invest In Stocks With Little Money?

“If stock market experts were so expert, they would be buying stock, not selling advice”

Norman R. Augustine

A quick search of “investing” on Google raises images such as men in suits, bulls, money bags, and high-rise business districts. It is no wonder that the narrative of investing being for the rich is common amongst the general public.

But this is merely one of many myths – the biggest of which insinuates that investing is only reserved for Wall Street. Instead, we’re here to debunk the myths of Wall Street and show you how the main street can participate to democratise capital markets and earn potential returns.

Myth #1: Investing is expensive

The notion that you need vast vats of money to succeed in investing in stocks is a short-sighted argument. Unlike purchasing a house or a car, purchasing stocks does not require a down-payment or a minimum spend – in short, you do not need a vast sum of money to begin investing.

Instead implementing some financial planning and setting investing objectives are strongly advised to account for expenses when determining our strategies. Truthfully, for a shoestring investor, the three major costs they need to be mindful of are brokerage costs, advisory fees, and portfolio maintenance costs.  

The proliferation of online brokerage firms has significantly lowered this barrier to entry with platforms such as Sharesies, Raiz, and Superhero allowing investors to be investing small amounts of money incrementally. Most investing platforms no longer charge a portfolio holding fee nor have minimum thresholds so even sparing that $5 coffee, would be sufficient for starting your investing journey.

And even in the case that you want to invest in an expensive company such as Google, with a stock price exceeding $2,700 USD, the mechanism of fractional investing allows you to purchase a small percentage of Google’s share, at a fraction of its price. Instead of paying that $2,700 USD, fractional investing allows our $5 to be put into investing in Google – demonstrating that we indeed, do not need vast sums to begin investing.

For those convinced that perhaps a higher amount is better, an element of budgeting should be introduced when assessing personal finances. Briefly, one’s budget should be divided into three areas: 

  1. Spending: Both on essentials and discretionary items
  2. Savings: An emergency fund is strongly recommended, with many also have a long-term savings account
  3. Investing: This is the portion of our money we are prepared to risk, to seek potential rewards.

“Don’t save on what is left after spending, but spend what is left after saving”

Warren Buffet

Advice has also become increasingly available and affordable. However, this is perhaps an area where it is worth paying a premium as the quality of advice varies greatly. We also need to be cautious as to what advice is being given, if an advisor is recommending a buy and has held a large portion of its stock in their portfolio – then naturally you buying the stock is likely to increase the value of his portfolio. Instead, reputable sources should be sourced and even though it is recommended, the advisory is not essential to begin investing.

Myth #2: Investing is difficult

Whilst the prospect of consistently making excellent returns is certainly difficult, beginning to invest, and even making returns is not necessarily as complex as it seems. There are no fancy valuation models at play, nor are we using technical analysis to predict patterns; instead a little creativity and unorthodox thinking can go a long way.

Perhaps we feel that we do not have an adequate sum to begin a diversified portfolio? Again, fractional investing could be leveraged where we split our initial sum between 10 different companies to construct a diversified portfolio. Or we could get a little creative and investigate alternative investment vehicles.

Mutual funds combine stocks, bonds (and sometimes other securities) into a single portfolio and are available for investors to purchase shares in the combined portfolio. Mutual funds may list Exchange Traded Funds (ETFs) where different portfolios of different objectives and compositions can be utilised and tailored to the needs of an investor. The 5 ETF types on the ASX are:

  1. Australian Equity ETFs
  2. Global Equity ETFs
  3. Commodities ETFs
  4. Fixed Income ETFs
  5. Currency ETFs

ETFs are an affordable and simple way to introduce diversification to our portfolio without having to conduct excessive research or formulate complex risk hedging strategies.

Similarly, for investors wanting real estate in their portfolios, Real Estate Investments Trusts (REITs) allow for investors to own property without going out to buy a house. Again, the are over 20 REITs on the ASX with different exposure to different property types as well as different risk prospects. In any case, they are an inexpensive means of introducing alternative assets into our portfolio.

Finally, an investor on a budget should never underestimate the power of compounding interest. Let’s use an example here. Say we start with $100 and put it into an account with a savings rate of 5% per year for 10 years.

With simple interest, that $100 becomes $150.
Equation: 100(1+0.05(10))

With compound interest, that $100 becomes $162.89.
Equation: 100(1+0.05)^10

That is not to say we should put our money into a savings account. The ASX200 has averaged a compounded return rate of 7.7% over the past 10 years, meaning our $100, would now be $210 today. It can be easy to dismiss the power of such a simple mechanism but compounding is indeed an intelligent, inexpensive, and feasible way to increase our yields.

Myth #3: Investing is about timing

Admittedly, there is an element of truth to this. Timing is an important factor in deducing when to buy or sell but it is arbitrary in the scope of deciding when to start investing.

As mentioned before, investing is not just about making that single transaction; it can be about firstly doing some budgeting, perhaps some research, or speaking to advisors. Once we feel ready, then we can begin putting our money into acquiring some assets.

We can even set the period on when we want to increase our money invested. Our contributions can be made on any basis ranging from weekly, monthly, or even quarterly and we even have the freedom to set the amount for these contributions. Of course, this does mean we may not always be buying in dips (or selling in peaks) but does not prohibit our investments from making gains, whilst also freeing us from the task of constantly monitoring markets.

This is not a call for us to be reckless with our timing. But it is instead, asking us to evaluate whether our contributions are suitable for our circumstances. For example, you may revise your super contributions to adjust for your spending needs or income changes.

With regards to timing, patience is a critical element even for a shoestring investor. Warren Buffet and other famous investors did not amass their fortunes overnight, or in a year; they were patient in their pursuit and strong in their conviction, allowing them to amass knowledge and consistently improve their returns. It is tempting to hastily react to market activity but we should caution against letting short-term events dictate our long-term strategies.

To conclude, whilst the notion of “right timing” is heavily disputed; what is not, is the notion of getting started early.

how to invest in shares with little money. photo of a man working on his laptop.

Myth #4: Investing requires a lot of work

Whilst the research, analysis, discussion, and monitoring of performance may seem like a taxing and tedious process, we do not need to fall victim to this fallacy.

Indeed, it is wise to check on the performance of your portfolio but checking it every single day may be a futile task. Instead, it might be useful to keep up to date with the news, read more about investing strategies, and listening to what advisors have to say about certain stocks, industries, and economic events.

There are multiple free resources for us to stay up to date on activity in the market. Likewise, we do not need to construct complex valuation models for us to identify attractive opportunities. Whether or not we make a gain or a loss, it is important to realize that there is a lesson to be learned – in understanding the market, understanding the stock, or even understanding ourselves.

We do not need the complex range of financial instruments endowed to institutions nor do we need the complex algorithms or valuation models. With a little bit of creative thinking, commentary from advisors, and a willingness to improve our business acumen, we can gradually build our knowledge and confidence in investing- even if we start on a small budget. 

Summary

So there you have it. Investing does not need to be an expensive endeavour; nor is it a difficult task shrouded in mystery. Investing is not always about the timing and it indeed does not require substantial amounts of work. Even on a small budget, we can begin learning more about investing, strategising our purchases, and constructing our portfolio.

Investing is no longer reserved for the men in suits or the executives in shiny new offices. The main street can raise its hands and utilise the proliferation of knowledge, financing options, and investing strategies to gain potential returns. 

Not sure where to start? We’ve got great guides on how to invest, what are dividend stocks, and portfolio construction here on our blog to help you get started with investing.

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