What is the ideal starting capital for investing? Unfortunately, we have to disappoint people looking for the outright answer: the exact amount to start investing, cannot easily be expressed in a number.
It is often not entirely up to you to determine with what amount you want to start investing. Banks and brokers often require a minimum deposit. Sometimes it’s 50 Euros, but it can also be a much higher amount. You should find that out first.
Perhaps it is better slightly change the question from how much money is it worthwhile to start investing to the following: to what amount doesn’t it make sense to start investing because the rewards are too small?
If you do not have more than one thousand Euros, do not start trading. If you only have less than 2,000 Euros to start trading with, than scratch your head once more. Between 2,000 and 3,000 euro it starts to become worthwhile to start investing. You can also invest periodically, but then first read this.
Costs affecting profitability
It is not a law of the Medes and Persians, as shows this example calculation exemplified by an ETF (index tracker) which invests in all 100 stocks of the FTSE 100. With an online broker it quickly costs between ten and twenty Euros to purchase this ETF. Also, a broker asks a few bucks maintenance fee and charges the owner of the ETF usage fees for an average of 0.20% per annum.
All of these costs come at the expense of the yield. The ETF has to perform very well to become profitable on a deposit of only 1,000 Euros. The FTSE rose 4.09% last year. The ETF had produced 40.09 Euros return. After deducting all costs you won’t have made much more than when you had put the 1000 euro on a savings account that had 1% interest. The costs make up too big a portion from the returns, while the risk is much greater than with saving. If 2,000 Euros was deposited, the profit before deduction of costs was 80.18 Euros, and then it starts becoming interesting. You see that the higher your starting capital for investing, the smaller the effect of the fees on your profit.
Between about 2,000 to 3,000 Euros investing becomes interesting, particularly in ETFs or mutual funds. They make it possible to invest in dozens of stocks, bonds or commodities with a single transaction. Thus, risks are lower and you probably pay less transaction fees. If you buy individual stocks, you make yourself dependent on the performance of a handful of companies. The transaction costs are probably higher as well, because you have to buy each stock separately on the stock market.
Finally, the question: How long should I keep the fund or ETF before I can expect results? Be patient: an investment must be given time to increase in value. Buying something at the stock market today and selling it tomorrow is not investing, it is speculating. Investment experts who look at the long term often say that you should hold an investment three to ten years. During that time – called a market cycle – all the ups and downs of the stock market have passed.
Sage advice: Know yourself
To conclude, a sage advice. CNN asked both the man on the street and stock market experts the following question: What would you do if you had a thousand dollars to invest? The laity and stock market gurus were remarkably unanimous in their response: knowing yourself is at least as important as knowing all stock abbreviations and things. Make sure you know what kind of investor you are and how you emotionally deal with winning and losing before you actually start investing.
More advice: only invest with money you can afford to lose. Investing involves more risk than a savings account. In return for the additional risk you would expect a higher return than the savings account. You should always keep enough cash on hand to replace a broken car or washing machine.