Editor’s note: This article was first published in June 2011. The flat €5 commission per trade and the suggested starting amount of €1,000–3,000 reflect 2011 brokerage fees. Many brokers now charge much less or nothing, and some offer fractional shares.
This is a very common question among people who want to get started investing in the stock market. Without meaning to offend anyone, the question itself reveals one thing above all: the person asking isn’t ready to start investing yet and still lacks the basic, necessary knowledge. So whatever the minimum is, why throw your money away?
There is no minimum for investing in the stock market. Investing in stocks means buying shares, so you can buy one share or 10,000. You can buy a single share that costs you €3, or you can buy 10,000 shares. The problem is that the commission for buying or selling is exactly the same for both trades, regardless of the amount. That’s why there’s no minimum to get in, but there is a smart minimum. Here are a few easy-to-follow examples.
Suppose you plan to invest €100 (which isn’t advisable). You find a broker that will charge you €5 for every trade you make.
That €5 is already 5% of your investment, so to make a profit your shares have to rise by more than 5% before they start to pay off — and don’t forget that when you sell them, you’ll be charged another €5 for that trade. Making 5% on the stock market is usually hard in the short term, so in this case, as you can see, putting €100 into the stock market is practically playing not to win.
If you invest €1,000 and you’re charged €5 per trade, that €5 is now 0.5%, which is practically insignificant.
Above those amounts, we hardly even look at what we pay per trade. I usually put the ideal amount to start investing in the stock market at €1,000–3,000. With those amounts, market movements start to show in our returns, for better or for worse.
However, as we have said on several occasions, although bad luck can play a big part in our investments, the stock market is not a game of chance, let alone a casino. So the game isn’t about asking how much you can afford to lose, but where you need to invest to win.
As for the saying that to learn how to invest you first have to lose… I don’t agree. If you never lose, it’s a sign that you learned well, and if you always lose… believe me, you’re not learning anything.
I’d also like to point out that in the stock market you don’t lose until you sell at a loss, and sometimes it’s a matter of patience until you get capital gains.
Two kinds of people go broke investing in the stock market: those who know nothing and those who think they know everything. — attributed to Warren Buffett
Further reading
- The 7 types of investors
- Common mistakes when investing in the stock market
- Serious investing mistakes
- How you can go broke investing in the stock market
- Warren Buffett’s investment guidelines
Featured image: Benjamín Núñez González, CC BY-SA 4.0, via Wikimedia Commons.
