If you don’t want to start a business, investing is the key to growing wealthy. And equities are a great way to invest because they are one of the few investments that will outpace require inflation and require almost no maintenance. Your shares of IBM won’t call at 2 AM and complain that the heat is out, and you won’t pay taxes until you sell the shares (unless your investments pay a dividend), so your money can compound.
So what is the best way to start investing in stocks, and how much money is needed? There are two ways to invest in equities – by purchasing individual stocks or by purchasing mutual funds.
Investing in individual stocks is the more risky option since you are opening yourself up to specific company risk. The company you select may have a bad quarter or bad year. On the other hand, if you select well you can prosper handsomely as the company you select grows faster than the rest of the market over a period of several years. Imagine what it would have been like to buy shares of Microsoft, Home Depot, or Wal-Mart in the early years and hold the shares until today.
Buying individual stocks is also tax effective. If you buy a growth stock with no dividend, your money will compound tax-deferred as long as you don’t sell your shares. Individuals like Warren Buffett and Bill Gates have paid very little in taxes relative to their vast wealth because they have kept most of their money invested and not sold many shares.
Buying mutual funds increases your chances of getting something close to the market returns, which has been around 10-15% over long periods of time. This is enough to make you a multi-millionaire by the time you retire if you invest a few hundred dollars a month through a 401k or other tax-deferred account. This is far better than the returns from a bank account or CD, averaging between 0-3%, or even bonds, which average between 6-8%. That difference in returns will add up to millions of dollars over a working lifetime.
So how much is needed to invest in individual stocks or mutual funds? Let’s start with individual stocks. Any stock that would be worth buying would cost at least $10 per share. You should buy at least 100 shares at a time to make it cost-effective. You would therefore need at least $1,000 to buy into an individual stock (plus maybe $25-$100 for brokerage fees). Having $2,000 would be better, allowing you to buy a stock selling at $20 per share or 200 shares of a $10 stock.
In mutual funds, you’ll want to buy into index funds since they have the lowest fees, meaning that you will get the greatest return. They also tend to have lower minimum purchases. The minimum amount you can invest varies by the fund, but you can find funds with initial buy-ins as low as $3,000. After that, you can send in a little money at a time – even $25 to $50 – and buy more shares of the fund. Some funds may even let you make an initial investment of $1,000 or less if you agree to sign up for automated payroll deductions to purchase more shares of the fund. This is a good way to go since it will force you to invest regularly, which is the secret to doing well and growing wealth.
Buying your first shares of stock or a mutual fund, however, is just your first step. If you want to grow wealthy, you should be buying shares regularly. If you are investing in individual stocks, you should be sending $300-$500 each month into your brokerage account and then buying more shares each time you have $2,000-$3,000 to invest. Do this for five or ten years, building up positions in several stocks, and you’ll have a $50,000-$100,000 portfolio before you know it that can actually contribute to your income. You should also start to diversify by purchasing shares of mutual funds as well once your account balance starts to build.
If you are investing in mutual funds, it is even easier. Just send $300-$500 per month into the fund company. Build up a $10,000 position in your first fund, then sell some shares and purchase shares in a second fund. Do this until you have positions in 3-5 funds that invest in different segments of the market, then keep contributing to build these positions.
Investing is a long-term process that goes well beyond your initial investment. It takes $1,000-$3,000 to get started, but then it is the regular monthly investments that really gets things moving.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.