When it comes to entering the stock market, the question arises how much capital is required. The answers can vary. This is not surprising, as there are usually no minimum amounts to open a brokerage account. Theoretically, even the smallest orders can be processed in stock trading. Consequently, the answer is determined by economic considerations and the reasonable structure of a stock portfolio.
Invest in the market, don’t trade
When it comes to gaining initial experience, the investment idea should be more important than the expectation of achieving outstanding profits through speculation. These speculations usually go wrong and in the worst case, the whole invested capital is lost. And every trade costs money. Beginners should rather strive to diversify risks and invest in the market than bet on individual stocks.
And how does it work? An investor can hardly buy all stocks traded on the stock exchange. This is, however, not necessary as a good market image can be achieved with a targeted selection of values from different sectors to create something like a representative sample. A well-known rule of thumb claims that just a dozen values are sufficient to obtain an approximate risk spreading. Scientific research, in contrast, assumes higher numbers with a minimum of 25 values. As an example: the DAX, Germany’s best known stock index and an essential indicator of stock market development, illustrates the thirty largest and highest-selling stocks on the Frankfurt Stock Exchange.
For small investors: stocks or ETF
If we assume that around 400 to 500 euros are invested for each stock position, at least 5,000 to 6,000 euros are required for a risk diversified portfolio, and for a greater diversification, 10,000 to 12,000 euros should be invested. Investing into index funds instead of individual stocks requires smaller amounts of money. Index funds or ETFs invest according to the principle of risk diversification by replicating indices such as the DAX. With the acquisition of an index fund or ETF, investors de facto purchase the respective market. In this case, it can be possible to enter the market with under a thousand euros.
A question of cost
Another important issue to consider are the costs for custody account management and stock trading. These depend on the fee model of the respective custodian bank or broker. Especially in the case of small investments or trading orders, the fees can reduce the yield greatly. For small investors, it is therefore particularly important to identify fee models that do not lead to disproportionate costs, especially with small investment sums. This can easily be done with our custody account comparison calculator. However, it is often unavoidable to pay a certain amount of fees. Let me give you an example:
Let us assume a model with free custody account management and a fixed amount of 8 euros per order. In this case, the initial compilation of a portfolio with 12 orders for different shares will amount 96 euros of order fees. With a volume of 100 euros per order, this means that at least 8 percent value growth must be achieved in order to compensate the costs. With an order volume of 500 euros per share, the necessary value growth already drops to 1.6 percent.
When you start trading shares, you should be prepared to invest at least 5,000 euros. You will need less if you start with ETF’s and find an economical fee model.