How to Invest in The Stock Market with Little Money?
Long gone are the days where you needed thousands of dollars to invest. Now, thanks to Robo-advisors, low-cost mutual funds, high-yield savings accounts, and more, you can invest with just a few bucks. For many people, the word “investing” conjures up images of men in suits, monitoring the exchange of millions of dollars on a stock ticker.
I’m here to tell you: you don’t need to be the Wolf of Wall Street to start investing. It’s okay if you’re more of a mouse of Main Street. Even if you only have a few dollars to spare, your money will grow with compound interest.
The key to building wealth is developing good habits—like regularly putting money away every month and nixing your Planet Fitness membership that you haven’t used in years (that alone saves you over $100/year).
Once you have a little money to play with, you can start to invest.
Three basic metrics every new investor should know
Knowing how to identify great businesses is more important than being able to identify cheap stocks. A great business will typically be a good long-term performer, even at a bit of an expensive valuation. On the other hand, a bad business you invest in at a cheap valuation will seldom work out well.
Once you’ve learned how to find good businesses, some basic stock investment metrics can help you narrow them down:
- P/E ratio: The price-to-earnings ratio is the most widely cited valuation metric. Simply divide a company’s current share price by its past 12 months’ worth of earnings. You can also use the projected earnings over the next 12 months to calculate the forward P/E ratio.
- PEG ratio: The price-to-earnings-growth ratio levels the playing field for P/E shortfalls. Simply divide the company’s P/E ratio by its projected earnings growth rate. For example, a company with a P/E of 30 and a 15% expected growth rate has a PEG ratio of 2.0.
- Payout ratio: The payout ratio measures the annual dividend rate expressed as a percentage of its earnings, which sheds light on dividend stability. For example, if a company paid out $1 in dividends per share last year and earned $2, it has a 50% payout ratio.
You can learn many other investing metrics, some of which can help you find value stocks and some of which can help you evaluate fast-growing companies or growth stocks.
Steps to invest in the stock market with little money
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.
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.
Learn to handle emotions
Emotions can be a stumbling block for many beginners if they are not good at handling it. Especially emotions such as fear, greed, anxiety, and overconfidence can be detrimental if you are in the stock market. Learn to control your emotions and it will help you all your life – not just in the stock market.
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 finances. 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.
Set long-term goals
Investing in the stock market is not a ‘get-rich-quick’ scheme and don’t let anyone tell you otherwise. If you want to learn how to invest in stocks for beginners with little money, start with a long-term goal unless you want to get into day trading.
Even if your aim is to learn how to start day trading with little money, don’t make the mistake of thinking that you will get rich by just placing a few trades. Whether you want to hold your stocks for the long-term or want to start day trading, think like a professional, not an amateur.
Keep It Simple
There are many young players who go a little over the top while strategizing and purchasing new software to gain an edge over the others. One must understand that there is no pot of gold that can be achieved. One must keep it simple to maintain financial stability. Keep your analysis also simple.
The final piece of advice is to invest in stocks of large companies. It is a safe bet for traders to invest in the top 200 companies. This will ensure that you do not indulge in junk stocks and ensure that you invest in the best that will fetch good returns.
Since time immemorial, equities have helped in long-term wealth creation for investors. This has immensely helped a lot of people to achieve their financial goals seamlessly. But the secret of creating wealth from the markets lies in the approach. If you keep the above pointers in mind you are definitely going to fare well in the markets and create wealth for your future goals.
Research and analyse stocks
Rather than following the herd mentality, learn to carry out your own analysis when you invest in a particular stock. It’s not that tough if you put in some effort. Fundamental analysis and a quick look at some trading patterns can always point you in the right direction.
If you are yet to decide on whether you should start investing in the stock market, let Angel One make it easy with a free Demat account, trading ideas, reports, fundamental research, and investment concepts and strategies. With 30 years of trust, Angel One is one of the largest, independent, full-service retail broking houses in the country.
Diversify Your Investments
Investment diversification protects your money from adverse stock market conditions as when it comes to investing, it is advised by savvy money managers that investors must invest money in various assets i.e. diversify their investments. It protects from losing all assets in a market swoon.
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.
Invest in Mutual Fund through SIP
MF is a long-term investment that invests in various securities and builds wealth if invested for a long period of time. The investment just starts with Rs. 500 a month.
Never invest with an expectation of earning quick returns, it is better to be patient and start your investment.
Conclusion: While taking more risks to earn greater rewards is part of what investing in stocks is all about, easing yourself into the field may be essential to making your experience a positive one.
To familiarize yourself with the process, consider sticking to conservative, relatively safe stocks and creating a portfolio of defensive stocks at the beginning.
You can always build out your portfolio to include bigger, riskier investments later on. If you decide to start branching out, a solid base can make it easier for you to experiment and take on a bit more risk.