Young people in particular who want to invest some of their money in stocks are often faced with these two questions: How much money do I need to invest in stocks and how much money should I invest in stocks. While the former is about a minimum requirement to get started in the stock market, the latter question deals with the relationship between one’s own savings and making that capital available in the stock market. We address both areas in this post by asking the question, “How much money to invest in stocks?“.
How much money to invest in stocks depends on the investor’s income and risk tolerance. 10% to 15% of income is a healthy savings rate to invest in stocks. Risk tolerance can be higher at a young age for potentially higher returns. However, as retirement approaches, volatility in the portfolio should be reduced.
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How much money do I need to invest in stocks?
There is actually no minimum amount needed to start investing. Nevertheless, it is recommended to make a deposit of 250 euros in the beginning. Although most brokers do not have minimum amounts, there are some factors that give you a good orientation for starting in the stock market and justify the recommended amount.
- Enough money to afford a single stock
- Enough money to diversify the portfolio
1. Enough money for a single stock
Of course there are many stocks under 1 Euro; the so called pennystocks. However, due to their volatility and associated risks, it is recommended not to start with these cheap stocks.
You can learn more about pennystocks in our article “What are Penny Stocks?“.
Instead, you should rather start your research and orient yourself on companies you already know. This keeps the research interesting for you. The price of a stock can vary greatly, of course; depending on the value and the stocks issued by the company.
However, some brokers offer to buy only a fraction of a stock for 10 euros, instead of paying 2590 euros for an Amazon stock, for example.
We have here a list of stocks that are suitable for beginner portfolios.
2. Enough money to diversify the portfolio
The amount you ultimately need to start investing in stocks is also based on how diversified your portfolio is.
Diversification is the spreading of your capital across multiple positions (industries, markets, companies). With a diversified portfolio, you reduce the risk of default that exists if you invest in only one company, for example. If there are several positions in the portfolio, the possible losses of one stock are balanced by the possible gains of another stock.
Therefore, you should avoid putting all your money into just one stock. This would lead to excessive concentration and therefore higher risk. Nevertheless, with a starting capital of 1000€ you do not necessarily have to spread over 10 stocks. It is enough to open a few positions. Especially if you plan to acquire more stocks in the future.
If you have a large starting capital of 20000€, then it is recommended to spread over 10 companies accordingly.
How much money should I invest in stocks?
Here there are also two factors that can help you figure out the right amount for you to start investing. One is a percentage of your income. Second, the amount is based on your risk tolerance.
1. What percentage of income to invest in stocks?
Many financial experts recommend a percentage of 10% to 15% of annual income. This may be a reasonable amount for a monthly savings rate.
Then, if your income increases by, say, 5% per year, but your remaining expenses remain at the same level, you can of course increase your savings rate by 5%.
You can also make sure to invest in stocks of companies that pay dividends. These annual distributions, you can then reinvest.
2. Invest according to your own risk tolerance
When we talk about a moderate investment plan, we assume an annual return of about 6.5% per year. This return is based on the historical performance of large-cap companies in the stock market over the last 100 years.
However, if your risk tolerance is lower and you prefer to invest in less volatile companies, you will need to lower the assumed return accordingly. That, in turn, requires an increased investment amount for the same result.
At a younger age, you basically have more time until retirement. This allows more risk to be taken for the potential of higher returns. However, as one approaches retirement, one should reduce volatility in the portfolio.
So, with the goal of 6.5% annual return, the portfolio should be built to match your risk tolerance – which will decrease over time. In fact, this is how you can maintain constant monthly deposits.
For example, if you would pay in 500 Euro monthly, after 10 years you would have paid in a total of 60000 Euro. With an annual return of 6.5%, this would be an additional 23350 euros. This means that after these 10 years you would have accumulated a total of 83350 Euro.
If you want to calculate with your own deposit amount, you can try it out here.
How much money you need to invest in stocks depends on the minimum price of a single stock and the need for sufficient diversification of your portfolio. How much money you should invest in stocks depends on a percentage of your income and your own risk tolerance.
If you’re still not sure whether you should invest in stocks at all, check out our post “Why Buy Stocks“. Here we give you 8 reasons why it’s worth starting investing.