Invest a small amount in stocks
One of the biggest misconceptions when it comes to investing in stocks is that you need a large amount. Such concepts deprive novice investors of the benefits of starting early and growing their wealth, as they often continue to wait on the sidelines to provide sufficient financing to invest in stocks instead of investing them early, even if they are small. The truth is that you can invest a small amount in stocks and enjoy the benefits of wealth creation in the long run.
Understand your financial strength
There are three aspects you need to focus on to understand your financial strength when investing a small amount in stocks:
Your financial goals
Why invest? While earning returns is the obvious answer, you need to know what you plan to use the money for. Are you trying to save for your retirement? Or do you intend to buy a home in a few years? Or maybe you plan to teach your children? Depending on the goals, you will be able to set timelines and the type of returns you need.
Your risk tolerance level
Try to measure the level of risk you can take:
- High risk
- Medium risk
- Low medium risk
- Low risk
Your investment horizon
While stocks tend to yield good returns over a period of 7 to 10 years, you should choose stocks that tend to offer reasonable returns based on your investment horizon.
Learn the basics
You are not required to be an expert to invest a small amount in stocks, but knowing the basics such as the basic parameters of the company including revenue, earnings, debt profile, margin, future growth prospects, etc., is very important when investing.
In addition, it helps you to check the company’s record regarding dividend payments, and the performance of the share price in the past few years to predict your future returns.
Focus on your savings
While saving money may seem like a hurdle, it is much easier than you think, all you have to do is get started. Create a budget for your monthly expenses and calculate a fixed amount for your availability. This will help you invest over time.
Start slowly
Find stocks that fall within your budget and find the best options. It is important to start slowly but surely, as as your savings increase and your understanding of the market increases, you will have a portfolio of stocks that you have hand-picked based on your investor profile.
Beware of penny stocks
Penny stocks are stocks available for less than $5. In most cases, these inventories are priced low because demand for them is low and there are no buyers for them in the market, or perhaps because the company’s financial condition is collapsing.
Many investors who have very little money tend to turn to these stocks because they seem like the best option given the limited resources. While the potential for growth may seem enormous, these stocks are high-risk stocks and you should think about them carefully before investing in them.
Invest carefully
When investors start investing a small amount in stocks, they tend to put off many stocks for later because they are very expensive. HDFC Bank stock is priced at about $21 per share for example. If you had a stock of $12, you wouldn’t be able to afford that share. But if you have a surplus of $64, you will often tend to rush into buying stocks such as HDFC Bank and others.
While a company may be fundamentally strong, investing a large amount at the wrong time can backfire. Always make sure that you find a good stock in all respects before you invest in it.
Your type of investment
Many new investors think diversification is for professionals, but this is a misconception. Investors should consider diversification and not over-expose their investment portfolio to a particular sector or market capitalization. Let’s say you invested in pharmaceutical stocks in 2018 and 2019, for example. But its shares have been defeated for some reason, which will cause your investment to suffer. Fortunately, you have invested in the hotel sector as well, which has been performing well,which should contribute to some kind of balance in your portfolio.
Avoid investment decisions based on emotion
Most new stock investors suffer losses because they allow their emotions to control their buying and selling decisions. The recent market crash due to the lockdown has caused many investors to panic sell low quality stocks.
Summary
If you are still hesitant to venture into stocks directly, you can consider mutual funds.
Many mutual funds offer SIP where you can invest as little as $5 per month in stock funds. This allows you to gain exposure to the stock market without having to invest individually in high-priced stocks. You can also replicate the methodology propagated by SIPs and create your own SIP to invest directly in stocks.
Remember, there are a lot of stock investing tips on the internet that are being given by famous investors by sharing their investment portfolios with people. Novice investors often tend to imitate these portfolios under the assumption that they will get similar returns.
This is dangerous because most of these celebrity investors do not share their entry and exit strategies. All you have to do is stick to the basics and look for the best ways to start investing with little money.
Disclaimer: The content of this article is for informational purposes only. The information provided should absolutely not be considered as investment advice or a recommendation. No warranty is made, express or implied, as to the accuracy of the information or data contained herein. Users of this article agree that Money Secrets does not accept responsibility for any of their investment decisions. Not every investment or trading strategy is suitable for anyone. See the risk warning statement.