You can begin investing in the stock market with a lot less money than many people think. Here's how much you need.
The minimum amount you need to open a brokerage accountSome self-directed online discount brokerage firms have account minimum requirements. Minimums for several popular ones range from as little as $0 to $2,500.
To open a traditional full-service, broker-assisted account, you may need several thousand dollars. Commissions will usually be much higher than with a self-directed account.
The minimum amount you need to buy stocksIf you want to buy a stock, you'll need enough money to buy one or more shares of that stock (plus brokerage commission). The share price of different companies varies.
A single share can trade anywhere from pennies for some companies to hundreds of thousands of dollars for an A-class share of Berkshire Hathaway. (Please be aware that stocks trading below $5 per share tend to be extremely speculative and dangerous, and usually not worth dabbling in for any reason whatsoever.) But many companies' shares cost, say, between $10 and $100 apiece.
For example, suppose you want to invest in Compass Minerals, a company that mines for salt and sulfates, and its stock trades for $73 per share. Commission for a typical online discount broker might be $7. You could buy a single share of the salt-mining giant for a total cost of $80 ($73 + $7).
The minimum amount you need to buy a stock, practically speakingAlthough you can invest in a stock like Compass for as little as $80, you generally don't want commissions to eat up too much of your investment. A decent rule of thumb is to keep your commission below 1% of each investment.
Let's return to our example above. If your brokerage commission is $7, and you want to keep commission costs below 1%, then you'd want to make at least a $700 investment. (Technically speaking, this would be a $707 investment plus commission, for the pedants out there -- but remember the 1% rule is only a guideline.) You could buy 10 shares of the salt miner at $70 apiece for $700 (plus $7 commission), for a total cost of $707.
The minimum amount you need to invest in a fundMany mutual funds have minimum investment requirements. If you want to diversify your investments in the stock market by owning a mutual fund such as an active fund or an index fund, you'll need to meet that particular fund's minimum requirement.
For instance, the Vanguard S&P 500 Index Fund, a robot that invests in 500 of the largest American companies, is a reasonable investment for most new stock-market investors. The fund requires an initial investment of at least $3,000. This amount is fairly typical of funds that have minimum investment requirements.
If you don't have that much money to invest, yet still want to capture the diversification benefits of an actively managed or index fund, you can invest in a fund that trades on an exchange -- just like stocks -- such as a closed-end fund or an exchange-traded fund (ETF).
The SPDR S&P 500 ETF basically does the same thing as the Vanguard S&P 500 Index Fund, yet has no minimum requirements because it's an exchange-traded fund. If it trades for $200 per share, your broker charges a $7 commission, and you decide to keep your commission cost below 1%, you could purchase four shares of the ETF through your brokerage account for $800, plus $7 commission, for a total cost of $807.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in theFoolsaurus. Pop on over there to learn more about our Wiki andhow you can be involvedin helping the world invest, better! If you see any issues with this page, please email us email@example.com. Thanks -- and Fool on!
The article How Much Money Do You Need to Open an Investment Account in the Stock Market? originally appeared on Fool.com.
The Motley Fool recommends Compass Minerals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.