One of the biggest misconceptions surrounding stock investing is that you need a sizable amount, to begin with, or stock investing is reserved only for the ‘wealthy’. Such misconceptions rob novice investors of the benefits of starting early and growing their wealth since they keep waiting on the sidelines to save enough first. The good news is, you can start with as little as Rs 100-500 in the stock market and enjoy the wealth creation potential of this investment avenue. Keep the following things in mind to learn how to invest in the stock market with little money.
In this article
Understand Your Investor Profile
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? Maybe, you want to create a corpus for your child’s higher 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 investments (in general) or stocks (in particular). 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
We don’t expect you to be an expert at stock investments. However, you need to understand the fundamentals of how the markets function and factors that influence stock performances before you invest money in stocks.
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.
Investment is not a 100m sprint – in fact, it is a marathon. You need to start and stay energetic to give it a boost when the time is right. 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 and/or the company is 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 Gains or Surplus Funds Carefully
When investors start with little money, they tend to put off many stocks for later since they are too costly. For example, an HDFC Bank stock is priced at around Rs.1000 per share. If you have an investable sum of Rs.5000, you might not want to buy it. When such investors receive surplus funds, they tend to rush towards these high-priced stocks without giving it a good thought.
While the company might be fundamentally strong, investing in a lump sum at the wrong time can be counterproductive. Hence, even if you receive a good annual bonus at work or a windfall gain from somewhere, stagger your investments, and make smart decisions.
Many new investors think that diversification is for seasoned players. They buy stocks based on market prices or mere speculation. For example, during the current lockdown, many new investors entered the stock market to buy stocks that were selling at low prices.
They didn’t consider diversification and probably over-exposed 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.
On the other hand, if they would have ensured diversification, then they could have benefited since some sectors would also grow post-lockdown.
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.
An unemotional decision-maker would assess the decision against facts and data and probably hold on to quality stocks while redeeming the ones that are not fundamentally strong.
Give Systematic Investment Plans (SIPs) A Shot
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.
A successful investor does not take chances – he/she makes informed decisions and invests his hard-earned money in stocks that are strong enough to succeed. Invest wisely.