How much do you need to start investing?

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Despite what you might think, you don’t need to be wealthy to invest.

Simply saving $5 a week in a savings account is investing.

But if you were looking to invest in the share market, the minimum you need is around $500. That’s about the minimum parcel size of shares most online brokers will allow. But you’d also have to allow a bit extra for brokerage fees which are generally from $15 to $30 per trade.

With $5,000, you could buy $500 worth of shares in 10 companies – although there are some negatives to that strategy. For a start, brokerage on 10 trades would eat into your returns, requiring you to generate higher performance. As an example, $15 brokerage on a $500 trade is 3%, so you’d need the share price of each stock to rise by 3% before you break even. If you bought shares in one company with $5,000, your brokerage costs would be 0.3%.

With interest rates at all-time lows, if you have $5,000 or $10,000 sitting in a bank account or term deposit, the most you will be earning is around 3% in interest a year. If it’s in a normal bank transaction account, you’ll be lucky be earning 0.01% interest, so it would make sense to invest it into the share market, where there are plenty of options including large blue chip companies paying 5% or higher in fully franked dividends. Add in the franking credits and you’ll be grossing more than 7%.

The key is that you should only invest in the market for the long term, with money you don’t need in the short term. There would be nothing worse than to invest your hard-earned cash into the market, only to see it plunge temporarily, and then be forced to sell out because you need the cash for an unexpected expense.

And if you own one or more credit cards with a heavy balance, forget about investing in the market, or anywhere else. Many credit cards charge up to 20% or more on outstanding balances, which means you’d need to make 20% returns on your stocks to beat the return you could make just by paying down your credit card debt.

Over the long-term, the share market generates annual average returns of around 10%, although it will fluctuate from year to year. So forget about getting rich quick, and plan to get rich slowly. As the world’s greatest investor Warren Buffett has said, “The share market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.

If you’re looking to dip your toe into the share market and don’t know where to start, a good place is to first read “Your 13 steps to Financial Freedom“. In Step 7, we outline which stock to start with – which is an index-tracking exchange traded fund, or ETF. If you think it sounds complex, it’s not really, and the perfect place to start your share market investing journey.

Whatever you do, please ignore the advice or tips of your mates, friends or random taxi driver to buy this or that small resources explorer, promising biotechnology stock, hot tech stock.  That’s akin to betting on red or black. Chances are high that you’ll lose your dough.

Ignore the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) too. You can get instant diversification from an ETF, unlike investing in a single stock such as one of the big four banks, which is a good thing. Trust me.

Foolish takeaway

If you haven’t started already, there’s no time like the present, as they say, to begin investing in the stock market and you only need $500.


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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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