It is possible to start trading and buying stocks online with only $1,000; however, this limitation comes with its own set of obstacles. Strategy will matter even more when working with a budget, so to speak, than if you have unlimited resources with which to buy and sell stocks. There are extra costs attached to trying one’s luck in the stock market a new investor will do well to know in advance.
Three important aspects to know when buying stocks starting with $1,000 include commissions, minimum deposit restrictions, and diversification.
#1: Prior to opening an investment account for buying stocks, new investors should consider what commissions are due once the account is opened.
Trading on the stock market is not like purchasing whatever one wants in an online store. Each time a buyer chooses an investment, commissions are almost always attached. In other words, spending money costs more than just the price tag on a share of stocks.
Keeping this information in mind may inspire pause prior to making a number of purchases buying stocks online. Trading fees are not limited to purchases; even when an investor chooses to sell stocks, it will cost him or her money. Using a limited starting amount should emphasize the importance of stock selection when the fees attached to buying and selling stocks may range from $10 – $30 per trade, depending on the broker.
It is important to note the differences again between trading stocks and buying merchandise; investors are charged trading fees per stock. Therefore, if one wishes to purchase three different stocks simultaneously, a fee is charged against each of the three stocks. If one incurred the low-end fees for those three stocks, $30, this is 3% of the original $1,000 and translates to a loss; this reduces the account to $970, before the stock has a chance to earn a single cent. If the same investor decides to sell, the fees apply again simply for entering and exiting holding positions.
#2: When approaching a brokerage firm to start buying stocks, another obstacle to consider is the minimum deposit requirement attached to signing up with a stock broker.
There are essentially two kinds of stock brokers; full-service and discount brokers. Full-service brokers accept tasks beyond buying and selling for an investor to include accepting calls from their clients seeking advice. This kind of service comes at a higher cost and is more typically associated with $50,000+ accounts. The discount broker is likely the only option when new investors are starting out with only $1,000. Though the fees are lower, so is the level of service. Sites for buying stocks online, such as ShareBuilder, may assist an investor with finding a discount broker willing to work with a small starting investment. Take no shortcuts in reading the fine print as various restrictions and higher fees may apply to varying kinds of trades.
The other option is buying stocks directly from the company of choice through direct stock purchase plans (DSPPs). Unfortunately, there’s a catch to the DIY approach; these plans tend to come with a minimum investment amount ranging between $100 and $500.
#3: At some point during the process of finding stocks to invest in, diversification will become a necessity.
The only way to reduce the risk of the costs of investing in stocks is to diversify. A wider range of assets distributes your investments to improve the overall return should any one asset fail to be profitable.
While this element of buying stocks could significantly change one’s ROI, the first aspect of commissions illustrated the costs incurred with each stock purchased or sold. Starting out with only $1,000 for buying stocks may require starting small, perhaps with only two company’s stocks at the onset. While this is a higher risk, it may be a necessary limitation until a share begins to earn a profit.
A new investor seeking stocks to buy now may benefit greatly from understanding how to use mutual funds.
Mutual funds are pooled investments under professional management. Instead of selecting individual stocks to buy within the budget of $1,000, mutual funds aggregate investments from numerous small investors. These funds are managed under a specified financial strategy and happen to be the method through which more than $4 trillion is invested in the United States.
The biggest difference between jumping into the stock market and investing in mutual funds include acquisition and fees. While it is possible to set up these funds or bonds through a broker, contacting a bank with which the investor has a relationship is another method. Fees are the same no matter the amount invested when setting up mutual funds. If an investor can meet the minimum requirement to open an account, one may invest as little as $50 monthly in a mutual fund (otherwise referred to as dollar cost averaging or DCA).
When it comes to diversification, mutual funds tend to have a higher number of stocks and other assets within the fund.
With as little as $1,000, it is still possible to invest in stocks so long as selecting the right investments and weighing the associated fees are challenges worth facing.
The individual investor starting with $1,000 for buying stocks must decide if the risk and heavy research is worth the potential return. From reviewing commissions, finding minimum deposit requirements within the starting budget, and hiring an appropriate broker, a new investor has more to manage than money. Starting with mutual funds may be the least risky approach to commencing one’s journey into the world of buying stocks with a small initial deposit.
Each individual investor must size up the risks; no amount of preparedness or research is a guarantee each stock purchase will turn a profit. If the starting sum of $1,000 is a pain point to lose completely, it may be wise to hold on entering the world of buying stocks until that $1,000 is easier to lose.