Often individuals wonder how much is needed to start investing. Investing is a lifelong process where you need to devote money regularly, rather than something you save up for once and then are done. That said, you can start investing for around $2000-$3000. The possibilities for that amount of money are to buy a single individual stock or to put money into a mutual fund.If you buy a single stock you are taking the risk that something could happen to the company. Scandals occur, stocks miss earnings and drop, directors make blunders, and companies record losses for several years. A single stock will often move up or down by 10% or more in a month, and can sometimes drop by 50% or more in a single day if something really bad happens. Then again, single stocks also routinely double in a year, and some stocks will grow by 1000% or more over a period of 5-10 years. Because you only are risking $2000, it may be worth the risk of losing $1000 or more for the prospect of making $15,000-$20,000 in a 5-10 years.
If you are not willing or able to take that risk, you may want to invest in a mutual fund . (Note if you need the money in the next few years it doesn’t belong in stocks at all.) Mutual funds buy a whole group of stocks (10-1000 stocks), and therefore while the investment will move with the market, which generally changes between -20% and +20% each year, the risks of losing all or most of your money are greatly reduced. Again, however, your potential gains are also reduced. The Dow Jones Industrials and most indexes of large-cap stocks have sat essentially flat for the last 10 years. Returns of about 10-15% can be expected over long periods of time, but that means it will take about 5-7 years for your $2000 to turn into $4000.
If you already have $100,000, obviously the risk of losing $80,000 becomes more substantial since it would take a long time to earn that money back through work. For that reason it is best to increase diversification – the number of stocks held – as the size of a portfolio increases. This can be done either through buying several stocks, using mutual funds, or a combination.
Note also that you won’t become rich putting $2000 into a single stock. Investing needs to become a lifestyle where $50-$200 or more is put away from each paycheck. If you have a mutual fund you can send in checks each month and buy a few shares. If you are holding individual stocks you can save the money in a money market account until you have saved $2000-$3000 and the stocks you like take a dip in price, at which point you acquire more. You could also invest in a mutual fund and periodically buy shares of an individual stock using funds from the mutual fund as the balances grow.
The point is to keep adding money in good times and bad. Every little bit helps.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.