This kind of question’s becoming increasingly common as more and more people consider private investment in the equity markets as a viable option. It’s no wonder that stock market speculating has become more and more popular in recent times. You’ve now got access to more information than ever before which gives you the opportunity to analyse stocks quickly and in great depth as well as enter and exit your investments efficiently. With the pitiful interest rates offered by banks nowadays as well the idea of getting your money working for you is particularly tempting, particularly if you can do it from the comfort of your own home.
So then, can I invest $100 in the stock market?
Will I have a chance of making big profits that way? The truth is, if you think that you can start with $100 and make large profits in a matter of days, weeks or even months then you’re going to be sorely disappointed. After all, if things were that simple wouldn’t everyone be doing it? In order to elaborate on the question further it’s necessary to look at some of the factors involved in investing. One of the fundamental mistakes that people make is they believe long-term profitability in market speculation is primarily a factor of analysis skills. If they go through a bad patch their natural thought is to study more, learn more and analyse deeper until they know enough to predict the markets accurately. The truth is that success on the markets is actually mainly dependant on the psychological approach a person takes. There’s been many an investor with a massive knowledge of fundamentals, an in depth knowledge of technical analysis and access to a large investment fund who has nevertheless ended up broke. The fear that stops you from making a good investment because you’ve suffered a couple of losers in a row, the greed that makes you stake too much on the next one because you’ve won a couple in a row or even the anger that causes you to make investments that you shouldn’t do because you want revenge on the markets, these are the real financial killers and getting them under control is one of the most critical requirements of successful investing. If we accept that psychology is critically important then it stands to reason that money management is a massive part of that in investing. So back to our questions. Can I invest $100 in the stock market? Will I have a chance of making big profits that way? The same principles apply from a technical standpoint whether you’re investing $1 or $1,000,000. The market can only go up, down or sideways and you open and close your investments in the same way. If the differences between the two approaches is purely psychological then it would seem that a good way to learn the psychological discipline required would be to start with a small amount so any mistakes you make do as little damage as possible and become easier to learn from and move on. Unfortunately it’s not quite that simple and there’s certain factors that work against you that will make it extremely difficult to get anywhere with just a $100 investment. Firstly, you need to consider the brokerage commissions you pay for your investments. If you start with such a tiny amount of money then inevitably the fee’s are going to eat into your bottom line more and more. Since investing is basically a numbers game anytime that your edge is eroded away it makes it that little bit harder. The second factor to consider is that you will actually limit the stocks open to you if you’re only investing $100. Lots of the bigger companies in the world are priced at more than $100 a share, sometimes significantly more. In many cases these can be some of the safe and dependable stocks that you might actually consider investing in, particularly if your investment represents a significant amount of your available cash. Even if you do manage to find some cheaper stocks that are worth investing in you’re forcing yourself into essentially putting all of your eggs into one basket. If you start with a slightly larger fund it might seem like you have more at risk initially but the flipside is that you can spread your investment which if done correctly can actually keep your money more secure whilst still giving you the opportunity to invest in some slightly higher risk markets with larger potential upsides. I’ve obviously laid out two sides to the same argument here. Psychologically it’s far easier to start with a small amount because if you jump straight into the market with your life savings then you’re making something that’s already difficult 10 times harder because you know you can’t afford to lose. On the other hand you want to be investing enough so that you can diversify your portfolio properly, can afford to take some risks and can comfortably afford to pay the commissions required to your brokerwithout eating into your bottom line too much. The obvious answer is to take the middle ground and get saving until you can afford to comfortably risk an amount that gives you the best of both words.
Some alternative ideas for those those with a small amount to invest
If you don’t have enough money for a diversified stock portfolio, there is the option to buy into an index ETF or mutual fund. This would give you exposure to a major stock index such as the S&P 500 or the Dow Jones Industrial Average. Generally speaking ETFs have much lower fees than mutual funds and can be purchased just like any regular stock. ETFs don’t usually have minimum account sizes either. Here are some links to popular Index ETFs. SPDR Dow Jones Industrial Average ETF (DIA) SPDR S&P 500 (SPY)
Either way please just remember that Rome wasn’t built in a day. Successful investing takes time, patience, hard work, discipline and a little heartache along the way. If you’re in it for the long haul then forget about big profits for a second and make sure you’re in a position where you can approach the markets correctly both financially and psychologically.