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How to Invest in the Stock Market With Little Money?

18 November 2021
5 minutes

One of the biggest misconceptions when it comes to stock investing is that you need a sizable amount. Such misconceptions rob novice investors of the benefits of starting early and growing their wealth. They keep waiting on the sidelines to save sufficient finance to invest in shares. Or the fear of losing money too keeps them on the fence. 

But you as an investor can start as low as Rs 100 as an investment in the stock market and enjoy wealth creation over the long run.

Here is what you should keep in mind to invest in the stock market with little money.

Understand Your Financial Strength 

There are three aspects that you need to focus on – 

Clarity about your financial goals

Why are you investing? While earning returns is an obvious answer, what do you plan to use the funds for? Are you trying to save for your retirement? Or, do you intend to buy a house in a few years? Or perhaps your children’s education.

Based on the goals, you will be able to define the timelines and the type of returns you need.

Assessment of your risk tolerance

This is an important aspect as it helps you choose the right kind of stocks (in general). Try to gauge which risk bucket you identify with:

  • High risk
  • Medium-high risk
  • Medium risk
  • Medium-low risk
  • Low risk

Calculate your investment horizon

While stocks tend to generate good returns over a period of 7-10 years, based on your investment horizon, you can choose stocks that tend to offer reasonable returns.

Learn the basics

You don’t have to be an expert but know the basics of stock investments. This includes a few fundamental parameters of a company including revenue, profit, debt profile, margin and future growth prospects. Its area of operations also plays a vital role. Additionally, it helps you check the company’s track record on dividend payments. Check the stock price performance in the past year few years – whether there is a steady increase of the prices had been volatile. This could tell about your future returns from the same. 

Focus on Your Savings

While saving money might seem like a major roadblock, it is much easier than you think. All you need to do is start. Create a budget for your monthly expenses and factor in a fixed amount that you will save. Even if you can save Rs.500/1000 per month, over time, it will help you invest.

Start Slow

Investment is not a sprint. You need to start and stay for the wealth to be created. If you have Rs.1000 to invest, look for stocks that fall within your budget and find the best options.

Slowly but surely, as your savings increase and your understanding of the market grows, you will have a portfolio of stocks that have been handpicked by you based on your investor profile.

Beware of Penny Stocks

Penny stocks are shares that are available at Rs.10 or less. We are not saying that all penny stocks are bad. However, in most cases, these stocks are priced low because their demand is low. This means there are no buyers for these stocks in the market. The prices of such stocks could be low due to the company’s financial. It could be on the verge of collapse. 

Many investors with little money tend to turn to penny stocks as they seem like the best option given limited resources. While the potential for growth might seem phenomenal, these stocks are high-risk stocks and you must consider the risks before investing.

Invest Carefully

When investors start with little money, they tend to put off many stocks for later since they are too expensive. For example, an HDFC Bank stock is priced at around Rs 1660 per share. If you have an investable amount of Rs 1,000, you won’t be able to afford it. But if you have surplus funds of say Rs 5,000, usually, you along with many investors in the same situation, tend to rush towards buying stocks such as HDFC Bank among others. 

While the company might be fundamentally strong, investing in a lump sum at the wrong time can be counterproductive. According to many market experts, the market is overly priced at this point in time. Any stock investment you make today is expensive. However, you can still wait for a small correction to invest. Or perhaps, find a stock good to invest in. 

Diversify

Many new investors think that diversification is for seasoned players. It is not the case. 

Investors should consider diversification and not over-expose their investment portfolio to one particular sector or market capitalization. If the said sector was to suffer further due to any macroeconomic reasons, then their entire investment would be at risk.

For instance, Joe, new to stock market investment, had invested in pharma stocks in 2018 and 2019. The stocks were beaten down due to multiple FDA issues across all companies. The sector badly under-performed. Now, Joe’s investment too took a hit.

But he had invested in hotel sector stocks as well, which performed well. So this had balanced his portfolio well.

In 2020, with the outbreak of Covid-19, pharma stocks picked up well while hotel stocks were down. His portfolio was still in green thanks to the surge in prices of pharma stocks.

This is how diversification helps. Diversification need only be considered among stocks or sectors but across investment instruments such as equities, debts, and mutual funds.

Avoid Emotion-based Investment Decisions

Most new stock investors suffer losses since they allow their emotions to govern their buy/sale decisions. For example, the recent market crash due to the lockdown resulted in many investors selling good-quality stocks at low prices due to panic.

You should ideally make decisions against facts and data and probably hold on to quality stocks while redeeming the ones that are not fundamentally strong.

Your take

If you are still hesitant to venture into stocks directly you can consider mutual funds.

Many mutual funds offer SIP where you can invest as little as Rs.500 every month in equity funds. This allows you to gain exposure to the stock market without having to invest individually in high-priced stocks. You can also replicate the methodology deployed by SIPs and create your own SIP for investing directly in stocks.

Remember, there is a lot of stock investment advice on the internet with celebrity investors sharing their portfolios with people. Novice investors often tend to imitate these portfolios assuming that they will earn similar returns on a lower scale.

This is dangerous since most of these celebrity investors do not share their entry/exit strategies. Hence, stick to the basics and look for the best ways to start investing with little money. Investment is not gambling.

Happy Investing!

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