How to start investing with $10,000 or less

There are plenty of opportunities available for those looking to start investing in ASX shares with $10,000 or less.

Two red sneakers on the start line, indicating a new investor learning about share price movement and how to invest

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Starting your investment journey can be daunting, with much to learn and many options available. But investing in ASX shares doesn't have to be difficult or require a huge amount of money.

There are plenty of opportunities available for those looking to start stock market investing with $10,000 or less. 

The key is to get started. Then you can work on building your investment portfolio over time. Your knowledge of the investing process will improve as you gain experience, allowing you to streamline your investment choices.

The decision to start an investment portfolio is an essential step in reaching your financial goals. You may be investing for many reasons — to save for retirement, develop a nest egg, or grow your wealth.

Whatever the reason, it is never too early (or too late) to start. Plus, thanks to the range of investment options available, it is easier than ever to start investing, even with limited funds. 

So, how do you start investing with $10,000 or less?

Exchange-traded funds: A great beginner's choice 

Broad-based exchange-traded funds (ETFs) can be a solid way to start your investment journey. 

An ETF is a collection of securities that can include shares, bonds, and commodities that are listed on the Australian Securities Exchange (ASX).

The most significant advantage of ETFs is they provide instant diversification. This is crucial because it spreads your investment risk as you are buying multiple assets in a single trade for a single brokerage fee. 

Index funds: The most basic form of ETF

Most ASX ETFs are index funds, which means they aim to track the performance of a share market index.

The most well-known ASX index is the S&P/ASX 200 Index (ASX: XJO), representing the top 200 listed companies in Australia by market capitalisation. ETFs that track this index include the BetaShares Australia 200 Fund (ASX: A200), iShares Core S&P/ASX 200 Fund (ASX: IOZ), and the SPDR S&P/ASX 200 ETF (ASX: STW).

Australian investors can also use ETFs to gain exposure to international shares. You can buy these ETFs on the ASX. Some have broad global exposure, while others focus on specific regions, such as Asia and the United States.

For example, the iShares S&P 500 ETF (ASX: IVV) tracks the performance of the S&P 500 Index (SP:.INX), representing the top 500 listed companies in the US.

Index fund ETFs give you the best diversification because they provide exposure to shares in a wide variety of companies across many different industries, such as financial services, resources, healthcare, and utilities. 

Why is diversification important? Imagine if your whole investment portfolio was in ASX travel shares when the coronavirus pandemic hit. You would have been in for a very tough few years! However, when you hold a large variety of ASX shares across different industries, you are spreading your risk. This lessens the impact on your portfolio when one sector faces a significant challenge. 

Other types of ETF

Some ETFs are theme-based, such as the BetaShares Global Sustainability Leaders ETF (ASX: ETHI), which holds a basket of large global companies from many industries that meet strict sustainability standards. 

If you're particularly interested in one sector, there are ETFs providing exposure to single industries. For example, the BetaShares Australian Resources Sector ETF (ASX: QRE) tracks the performance of the largest ASX resource shares. 

The advantages of ETFs 

ETFs can be traded during the day, just like individual listed shares. They provide instant diversification and are purchased in a single trade for a single brokerage fee. This helps minimise your investment costs. 

A big advantage of index ETFs is extremely low management fees. The lowest fee index ETF on the ASX charges just 0.03% per annum. That represents roughly $3 a year for every $10,000 invested. 

An ETF also 'rebalances' itself over time to accurately reflect the index it is tracking. This reduces the need for an investor to rebalance their own portfolio and makes an ETF a great 'bottom drawer' investment for those unable – or unwilling – to dedicate significant time to managing their investments. 

How much money will you make investing in ETFs? 

Before 2020 and the COVID-19 pandemic market crash, the ASX 200 had given investors annualised returns of about 10%, including franking credits and dividends. Assuming the trajectory continues, in 20 years, every $1,000 you invest today will be worth more than $6,700. 

Minimising the cost of investing

There are always costs associated with an investment, but there are ways to minimise them. This, in turn, will enhance your returns. 

The first cost to consider is brokerage fees. These are paid each time you buy and sell an individual share or an individual ETF. Generally, brokerage fees charged by the online trading platforms range from $5 to $30 per trade.

To execute a buy or sell trade on the ASX, most brokers require a minimum order value of $500. Some brokers are more lenient than others in this area, but generally, $500 is usually the minimum amount.

If you decided to put your entire $10,000 investment into a single ASX 200 index fund ETF, you would pay just one brokerage fee. But if you purchased 10 different shares with your $10,000, you'd pay 10 brokerage fees to buy them, and another 10 fees if you ever were to sell them. If your brokerage fees are $30 a trade, this would cost you $300, or 3% of your capital. 

If you purchase an ETF, another cost is the annual management fee you will pay to the company running the fund. (The fee is simply taken out of your returns.) As discussed above, index fund ETFs are straightforward to run, so the management fees are minimal. 

If you choose an actively-managed ETF, where a professional manager is selecting which stocks to buy and in what quantities based on some form of criteria, you'll pay a higher fee. 

An example of an actively-managed ETF is the VanEck Morningstar Wide Moat ETF (ASX: MOAT). This ETF comprises a minimum of 40 high-quality US companies that are deemed to have sustainable competitive advantages (moats). As of May 2022, the management fee is 0.49%. That represents roughly $49 a year for every $10,000 invested. 

How to start investing with $2,000 or less 

If your beginner's budget is lower, say $2,000 or less, then investing apps can be a great way to dip your toe into investment waters. 

Apps such as CommSec's Pocket allow you to invest as little as $50, charging $2 a trade for trades up to $1,000. The app offers a range of ETFs.

Raiz is another popular investing app that can round up spare change from daily purchases to invest. The app offers a choice of diversified portfolios ranging from conservative to aggressive. At the time of writing, Raiz charges a monthly fee of $3.50 on account balances below $15,000. This equates to $42 annually, equivalent to 0.42% on a $10,000 portfolio.

How to start investing today

To begin investing your first $10,000, you'll need to choose a broker or online trading platform, set up an account, and place your buy orders. Then you need to decide which shares to buy.

As we've discussed, you don't need a massive amount of money to start your investment journey. The most important thing is to get started. Then, over time, you will be able to add to your investment portfolio and watch it grow. 

Consider starting with ETFs, and then perhaps broaden your horizons and invest in some individual companies that you understand well. Successful stock selection requires a lot of research and a solid understanding of risk versus reward. Don't rush these decisions. 

Ultimately, the size of your investment portfolio will be a function of the amount invested, share price movements, and what you do with any returns received. However you choose to grow your investment portfolio, the key is to be consistent and focus on the long term.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended VanEck Morningstar Wide Moat ETF and iShares S&p 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.