How much you need to start on the stock market ?

Stock 

When we go through the stock market forums or when we receive dozens of emails a day, we realize that this question is one of those that come up most often with beginning investor.The amount needed to start a stock market investment is apprehended in various ways by the young shareholders. Often, they tend to hide important elements, such as brokerage fees and largely minimize the minimum amount that can invest in good conditions.

Future stock market success does not depend on the amount of cash that will be deposited into the account. The wealthy shareholder will therefore be put on an equal footing with those who only have a few savings to start investing in the stock market.
                       

However, this reasoning reaches its limits when the deposits are too small, hence the purpose of this article. If there is no maximum limit against the amount that can be put on his title account, we offer however to give you some advice on the minimum amount. Often, we see that shareholders who are under capitalized, that is to say with too little money, are the ones who disappear most quickly in periods of market crisis.
The fact of not having enough money on his title account has several negative consequences that we describe below:

The impact of brokerage fees: To place orders on the stock market involves paying the intermediary who executes the order for you in the market. The average price of a stock market order is about 0.1% of the transaction amount with a minimum of around $5 on average. If you buy shares and resell them, you will have two orders: a purchase order and a sell order. This transaction will have cost you $10 minimum. To start making money, you will need to earn more than brokerage fees. Thus, with the minimum perception game ($5 per order) you are penalized if you place a small order. After a certain size, there will be no difference.

Exemple : In this example, we assume that the brokerage fees are 0.2% of the amount of each order with a minimum of $5 per order. Scenario 1: You buy for $500 of shares (ie 50 Alcatel shares at $10 for example). The Alcatel stock rose 2% in the following days, costing $10.2. At that point, you decide to sell your 50 shares to take your profits. In fact, we realize that in this operation you have not won anything. You bought $500 of shares that you sold 510 (50 shares at $10.2 ). As you have placed two orders, you paid $ 10 brokerage fee, your appreciation is canceled, you did not win anything. Scenario 2: Let's say now that you buy for $ 2500 worth of shares, ie 250 shares at $10. As in the previous example, you decide to sell your 250 shares at $ 10.2 because they have made good progress. What did you win? Purchase (-2500) + Sale (+2550) - brokerage (+5 +5,1) = + 39.9 euros. By making a $ 2500 transaction, you earned $ 39.9, or about 1.6% of gains for a 2% increase in the stock. The rest being brokerage fees. From this example, whether your order is $ 2,500 or $ 25,000, you will still earn 1.6% for a 2% change in the stock price. You are no longer subject to the minimum collection of brokerage fees. This impact of costs is often minimized, or even completely obscured by novice shareholders, which is a significant mistake, especially when we start with little cash. We also see an underlying problem that when we move small orders we have extra pressure on our shoulders. Indeed, we must achieve a minimum important performance to be able to return in our expenses (we saw it with a progression of at least 4% as in the previous example with an order of $500 ).

Abuse of leverage: The SRD allows you to invest more money than you actually hold on your account, and our cash plays the role of a hedge. In France, the SRD system makes it possible to commit up to five times more money than one has available. Thus, with a small account of $2000, one can invest up to $10 000 on SRD values ??at a time. In practice, we observe that the use of significant leverage is often the result of people with small portfolios. The more the portfolios grow and the more the investors reduce the leverage they agree. Do not forget that the leverage is double-edged, if it can increase the gains, it can also multiply the losses. When you invest in leverage five, which is the maximum level, a change of 10% of the share you invest in, varies our portfolio by 50%, up or down depending on the direction of change. value. We see with this simple example, the danger that results. Moreover, as small portfolios are often reserved for beginning investors, the danger is even greater.

No diversification possible: Without going into the arcane financial theory and portfolio management, there is no doubt that a portfolio invested on a single value is much more risky than a diversified portfolio that contains four or five different values. A small initial investment will therefore not allow access to portfolio diversification, that is to say a risk spread with 5 to 10 different values. Imagine the case where we bought shares of a company that announces the morning before the opening of very bad results. It will then follow a sharp decline in the stock, 10 or even 20% decline is a relatively conventional phenomenon on the stock market. It will then take a long time to find its purchase price by not being able to invest on other values.

Conclusion: We believe that the minimum amount to invest in the stock market in good conditions is around $ 2,000. This does not yet allow for great diversification, but allows to begin to be placed on two to four different values ??(about $1000 per action line) by modulating the leverage on the SRD from zero to twice maximum . To start a correct diversification, see to invest on other financial products, you will have about 5 to 7 000 $. Finally, to be able to start diversifying in other geographical areas, count at least $10,000. If you do not have this minimum amount to start investing directly in shares, we recommend that you first buy mutual funds (SICAV or FCP) invested in shares. This will allow you to buy a single product, to invest on several values ??at once. It is a management of your portfolio that will be much less dynamic but that will allow you to start to taste the stock market while waiting for greater savings.