How Much Is Needed to Start Investing?
by Charles Rotblut, CFA
What is the minimum dollar amount needed to start investing? It is a question some members ask us and likely one that many others have, especially those who are new to investing.
Technically, you are only limited by the minimum amount required by a brokerage firm or mutual fund company to open an account. ShareBuilder, an online broker, has no required minimum account balance. More than 50 mutual funds included in our annual mutual fund guide have minimum purchase requirements of $100 or less, including funds offered by Fidelity, AssetMark, USAA and Oakmark.
In this article
- Stocks and Brokerage Commissions
- Mutual Fund Advantages
- ETFs Are Even Cheaper
- Other Articles in the Beginning Investor Series:
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Pragmatically, you should weigh the dollar amount you have available to invest against the actual costs of creating a diversified portfolio. Brokerage commissions for buying and selling stocks and exchange-traded funds (ETFs) increase significantly on a percentage basis as the dollar amount invested decreases. Mutual funds, conversely, charge a flat percentage fee. Commission-free ETFs, which are offered by some brokerage firms (including Charles Schwab, Fidelity and TD Ameritrade) are even more advantageous from a cost standpoint.
Stocks and Brokerage Commissions
Most online brokerage firms charge between $7 and $10 per trade. Though this does not sound like much, commissions can have a big impact on small accounts. For example, say you have $1,000 to invest in a single stock. Your buy and sell orders will each cost you $10, resulting in a transaction cost of $20. This equates to a 2% reduction in your actual returns. Once you start factoring in the costs, your profit may very well not justify the risk of trying to pick an individual stock, if you are investing a small amount in a taxable account.
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Discussion
You editors of these financial info pieces should STOP saying that tax deferred means NO taxes incurred as you did in the last sentence. I have read this over and over in various info articles and it is NOT correct. You will pay the taxes, just not annually, you wait until you take distributions; but you will pay taxes on tax deferred accounts such as IRA at some point. To DEFER is to DELAY or POSTPONE not eliminate!
posted about 1 year ago by H from Texas
To clarify, there are no capital gains taxes incurred when a profit is realized on a position held in an IRA. Taxes are owed, however, at the time a withdrawal is made from a traditional IRA.
posted about 1 year ago by Charles Rotblut from Illinois
I have a question.Regarding having a limited amount of money to invest.Is it a good idea to buy a few shares of cheaper costing stocks initially and make additional purchases of those stocks as your money permits?
posted about 1 year ago by Benjamin from Missouri
Benjamin - The price of the stock does not matter. If you invest $10,000 into a stock trading at $5 or a stock trading at $100, your gain will still be the same. A 10% rise in either stock will give you $1,000 in unrealized gains (profits you have not realized because you have yet to sell the stock). So, find the best stock, regardless of its per share price. - Charles Rotblut
posted about 1 year ago by Charles from Illinois
A financial adviser at my local bank(where I have my checking, etc) is strongly suggesting I buy a Mutual fund(bonds) that has a front load of 4.5%.
Is there any good reason to buy a fund with a front load? Do bank financial advisers or the bank get some of this load? John
posted about 1 year ago by John from New Jersey
John-The front load means you will lose 4.5% of your investment right from the start. This means fund will have to generate a positive return of 4.71% just to get you back to break-even, and then, the fund will have to produce an additional positive return to either meet or beat its comparable index (e.g., the S&P 500). -Charles Rotblut, AAII
posted about 1 year ago by Charles from Illinois
so technically speaking, if its a roth ira no taxes are owned at withdrawl..?
posted 11 months ago by Elliot from New York
Elliot - Roth IRA no tax after you withdraw after age 59.5, anything prior to this would cost you a 10% penalty. However you can withdraw the principal contribution anytime you wish.
In traditional IRA you can not even withdraw principal because you already took the tax deductions.
posted 8 months ago by aku from Ohio
