Wednesday, 1 April 2015

How much do you need to start investing?

Does this sound like a familiar?

One of the most common question I get from people is "How much money do I need  before I can start investing?"

$100? $500? $1000?

Personally, I feel that one has to have at least USD$5000 or roughly SGD$7000 as a start. 

Take note that this amount of money must be money that you do not depend on. Risking money that you cannot lose is one of the biggest mistakes you can make as an investor and as an individual.

But why so much?

For those of you who do not know, there is a commission that you have to pay to your broker for buying and selling shares. This buying and selling of shares are two separate payments.

The commissions charges varies, but lets assume it to be USD$15 or about SGD$20 for the US markets. For the Singapore stock exchange, it will cost you SGD$25

Imagine you are buying shares from Singtel.

If you bought (long) 100 shares,

At current prices, that would cost you 100*$4.18 = $418

Lets say that you sold the share when it is $4.30. That would give you a profit of $430 - $418 = $12 Lets factor in the commissions now which would be $25 dollars for both buying and selling.

$12 - $25 - $25 = $38 (Loss)

You made a loss even though the market went in your favour. This means that to break-even in this situation, you would need the share to move by $0.50 before you even start earning any profits.

However, if you were to buy 1000 shares instead of 100, the net profit for selling at $4.30 would be $120 - $25 - $25 = $70 (Profit)

$70 dollars profit might sound good enough, but in terms of percentage, you have only made 1.67% of your capital ($4180). The commissions alone ate up almost half of your profits!

In conclusion, having more capital to begin with would ensure that your profits justifies the amount of risk they you are going to take as well as the cost that will be incurred. The cost mentioned here is just the commission fees, there are also other cost such as GST, service fees etc. Always make sure that you have considered such costs into your decision in buying shares or you could actually end up with a loss!

As always, if you have any questions, feel free to leave a comment.

Cheers.


12 comments:

  1. Hi SGT92,

    You might want to take note that most US brokers charge around $5-10 USD. There are even those who charge $1 USD per trade if you look around.

    ReplyDelete
    Replies
    1. Thanks for the info! I was assuming the use of singapore brokers

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    2. One thing I've learnt, never use SG brokers to deal with US stocks. It is very costly.

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    3. What brokers do you recommend? I'm currently trading CFD's

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    4. CFD is actually a contract between you and the broker. It depends on the broker to honor your contract. You do not really own any asset as you purchase the contract.

      If you are looking for a low cost commission, you can try Interactive Broker (minimum deposit USD $10k, commission only $1 per trade). Thinkorswim also have commission of $5-$9.95.

      Delete
    5. Does Interactive Broker provide leverage for trading CFD's?

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    6. Like i mentioned, CFD is not a official instrument. Hence US brokers do not offer CFDs (that i know of). Instead, they offer stock options (buying/selling stocks for a small margin). In a sense, it is the official instrument.

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    7. Ahh, I get it now. Thanks!

      Delete
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