How Much Money Should You Invest in Stocks?

How Much Money Should You Invest in Stocks?

Get started investing with just $5.

Image for postPhoto by Sharon McCutcheon on Unsplash

When young professionals first start investing in the stock market, there are two types of ?how much money? questions that come up:

  • How much money do I need to start investing in stocks?
  • How much money should I invest in stocks?

These are two very different questions.

?How much money do I need to start investing in stocks?? is about the minimum necessary to get started investing.

Whereas, ?How much money should I invest in stocks?? is about how much of your personal savings should you allocate to stock market investing.

Let?s tackle each of them.

How Much Money Do I Need to Start Investing in Stocks?

Technically, there?s no minimum amount of money needed to start investing in stocks. But you probably need at least $200 ? $1,000 to really get started right.

Most brokerages have no minimums to open an account and get started buying stocks. So theoretically, you could open an account today with just $1.

That said, there are three factors that set a natural floor on how little money you can start investing with. In general, you should have enough money to:

  1. Afford a single share of stock.
  2. Properly diversify your portfolio.
  3. Protect your profits from trading fees.

Let?s look at each of these more closely and understand why they?re important and how you might get around them if you?re starting with a small amount.

You Need Enough Money to Buy a Single Share of Stock

While many brokers allow you to open an account with just $1, there?s still the question of, ?What stock can you buy for $1??

There are certainly plenty of penny stocks that trade for under $1, but I wouldn?t recommend starting there.

Instead, based on your research, there will be a stock (or several stocks) you want to buy. In order to start investing, you need enough money to afford at least a single share ? which could range from $1 ? $300,000.

However, there?s a relatively new workaround to this problem. A few brokerage startups allow investors to buy fractional shares for as little as $5.

For example, you could buy $5 worth of Amazon rather than $1,823 for a single share.

Stash is an example of a company that offers fractional shares, although I haven?t used their services and there may be others worth considering as well.

You Need Enough Money to Properly Diversify Your Portfolio

Another factor to consider when getting started is you should aim to buy enough stocks (different positions) to be properly diversified.

How Many Stocks Should You Own?

What does that mean? Company risk includes investing risks that stem from the specific companies you buy (for example?

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Put simply, your goal should be to own between 10?30 positions.

If you only have $1,000 to invest, I?m not saying you need to divide it among 10 positions. It?s fine to start with just a few positions, especially if you?re planning to add more over time.

As you add money to your investment account, I?d suggest buying a different stock with your next $1,000, and a third stock with the $1,000 after that.

You want to avoid piling all your money into a single stock since this leaves you overly concentrated and your entire investment future tied to a single position.

On the other hand, if you?re starting off with a larger amount of money (say, $20,000 or more), you may want to jump right in with a portfolio of 10 positions ($2,000 per position).

Whatever your starting point, just keep in mind you want to get some healthy diversity as soon as possible.

You Need Enough Money to Protect Your Profits from Trading Fees

Another element to consider is trading fees. If you?re starting with a small amount of money in your investment account, trading fees could really eat into your profits.

Let?s look at an example.

Imagine you?re starting with just $100. You buy a single stock for $100 and immediately pay a $5 trading fee. Then, the stock goes up by $10, and you sell it and pay another $5 trading fee.

Unfortunately, your gain was completely wiped out by trading fees. You started with $100, immediately lost $5 in trading fees, gained $10 when the stock went up, and paid another $5 in trading fees. You ended up with your original $100.

Another way to think about it is when you bought the stock for $100, you were instantly down 10% on your investment because you had $10 in trading fees to overcome until you could earn a profit.

Now, fees only do this much damage to profits when you?re investing with small amounts.

If you were to invest $5,000 or more, a pair of $5 trading fees would only reduce your profit by 0.2%. No big deal.

On the other hand, if you invest anything less than $1,000, you?re instantly down 1% or more before your stock even has a chance to move.

If you plan on investing over $5,000, then you can probably go with any major online broker. Most charge between $5 ? $7 per trade and they continue to drop their prices.

But if you?re starting with less than $5,000 (which is totally fine), you may want to seek out a broker that offers free trades.

Now, let?s look at the second question ? how much of your personal savings you should allocate to the stock market?

In general, I try to invest as much as possible in the stock market because the incredible power of compounding can create so much wealth over the long term.

Every extra dollar you invest wisely in the market today could be worth $5, $10, $20, or more in the future.

However, there are some very important guideline I follow to limit how much I invest in the stock market:

  • Never invest so much money that it would risk your financial future.
  • Never invest money you?ll need in the next 5?10 years.
  • Never invest so much money that you can?t sleep well at night.

Let?s look at each of these in more detail.

Don?t Risk Your Financial Future

Don?t take outsize risks that could bankrupt your financial future.

Yes, the allure of having all your money compounding in the market is tempting. But remember that it?s not unusual for markets to decline by -50% or more in a single year.

And some investors, through either poor investing decisions or bad luck, can lose all their money in the market.

There?s an old saying on Wall Street:

?Bulls make money, bears make money, pigs get slaughtered.?

It means that bulls ? investors who think the market is headed up ? make money over time.

Bears ? investors who think the market is headed down ? make money over time.

But pigs ? investors who are greedy, impatient, and excessively risky ? get slaughtered.

When it comes to stock market investing, it?s not a place to make risky bets. So never invest so much of your savings that a -50% (or more) decline would devastate your financial future.

Or, to use the words of legendary investor Warren Buffet:

?Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.?

Don?t Invest Money You?ll Need in the Next 5?10 Years

Another pearl of investing wisdom is never put money in the market that you?ll need soon (typically the next 5?10 years).

Why?

There are a few reasons.

First, markets can decline quite a bit during downturns, which would significantly shrink how much money you have available.

For example, let?s say you have $30,000 to invest in the market and you?re planning to buy a new home in two years.

You put your $30,000 into some great value stocks, but a bear market roars and the S&P 500 declines by -60% in two years.

Your value stocks only decline -50% (which is much better than the market), but now you only have $15,000 for a down payment on a home. You may need to put your new home purchase on hold.

This is why investors say you should only invest money in the market that you could see decline by -50% and won?t need to get out anytime soon.

The last thing you want to do is buy high, watch the market decline by -50%, and then take your money out of the market at its lowest point, right before a long and prosperous recovery.

Another reason not to invest money in the market that you?ll need in the coming 5?10 years is you don?t want to be forced to sell out of your positions before you?re ready.

For example, imagine you do a ton of research and invest in a good value stock. To your delight, it goes up 10% and appears to be poised to keep rising.

But because you need the cash for something outside of investing, you?re forced to sell your shares and miss out on potential future gains.

This can also cause you to realize a tax bill on your capital gains sooner than you were expecting.

Bottom line: Don?t invest money in the market that you may need in cash over the next 5?10 years.

Don?t Invest So Much Money That You Can?t Sleep at Night

This is a simple one.

If you?ve invested so much money in the market that every little pullback and correction keeps you up at night, then you?ve either put too much in or stock market investing may not be right for you.

Now, I?m not suggesting you shouldn?t care about or keep track of your investments. Quite the opposite.

But you don?t want lots of stress from investing. It?s unhealthy and will drive you to make bad investing decisions driven by fear and emotion rather than logic.

Summary: How Much Should You Invest in Stocks

For most new investors, I?d say, ?Just get started.?

There?s a lot to learn about investing in the stock market and it?s good to experience some of those early lessons with less money at stake.

More important than how much money you put in today is how much you add over time.

For several reasons, steadily adding to your investments over time is likely to provide a huge boost to your long-term wealth.

So start with what you have today and add more money, positions, and strategies over time based on what you learn and what works best for you.

And remember these key lessons:

  1. There?s no minimum to get started investing, however you likely need at least $200 ? $1,000 to really get started right.
  2. If you?re starting with less than $1,000, it?s fine to buy just one stock and add more positions over time.
  3. If you?re starting with a small amount, some brokerages allow you to buy partial shares for just $5 or place free trades.
  4. I try to invest as much as I can in stocks because every extra dollar I invest wisely today could be worth $5, $10, $20, or more in the future.
  5. However, never invest money in stocks that you?ll need in cash in the next 5?10 years.
  6. Never take outsize risks and invest so much money that your overall finances are at risk.

Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. All information is obtained from sources believed to be reliable but cannot be guaranteed for accuracy or completeness. Use this information at your own risk.

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