Is $500 Enough to Start Investing in Stocks?

In this video from the Motley Fool Answers podcast, Alison Southwick and Robert Brokamp welcome Sean Gates to the show as they answer listener questions.

To wrap up the episode, the team discusses the minimum amount of money that you might need to start investing. While no amount is too small, the key is to avoid letting transaction fees eat up too much of your money and to pick stocks that fit in your price range. 

A full transcript follows the video.

This podcast was recorded on Dec. 13, 2016.

Alison Southwick: And we have our final question.

Robert Brokamp: Da da!

Southwick: We're finished. We're at the home stretch. This comes from Kurt. "I currently don't own any stocks directly -- only those in my 401(k), which is managed by the firm my company uses to administer our plan. One of your recent podcasts got me interested in buying some stock on my own, but I don't have a lot of spare money laying around to get started. However, I will be receiving $500 at the end of the year for participating in my company's wellness program."

Brokamp: Good for you!

Sean Gates: Yeah.

Southwick: I know! "Originally I thought I would buy a new home theatre receiver but decided maybe I would open a brokerage account and buy some stock, instead. So is $500 enough money to get started in buying stocks or should I just get the receiver and rock the house with Star Wars on the subwoofer? Any advice you can provide would be greatly appreciated." As you all know, I am a big Star Wars fan, so I am very torn by this.

Brokamp: Yes, as someone who named his firstborn Lucas, I am also torn about this when you threw the Star Wars part in there ...

Southwick: Yeah. Uh!

Brokamp: But to answer your question, yes, $500 is enough. We talked on a previous episode about this old Fool rule of thumb that you have to keep transaction costs to 2% of your investment, and then when we looked into it, we couldn't really find where the heck we came up with that.

Southwick: We just pulled the number out of thin air.

Brokamp: It's this old Fool lore, but it's still a good guideline. I mean, the one thing about investing a smaller amount of money is you don't want to buy 25 stocks and then have the commissions eat up everything. So there are brokerages out there that will charge you seven bucks, or five bucks. Some are even free. That's the only concern I would have, otherwise go ahead and start investing.

Gates: This question warms my heart, because it touches on getting people started. So just for a reference, there are stocks that exist that are worth more than what you are trying to invest. Priceline, for example, is an over $1,000 stock, so with your $500, you could not buy one share of Priceline. But that doesn't mean that you should not invest that $500. You can buy an index fund, or you can buy any other company that's worth less than $500.

Southwick: What's Disney going for today?

Gates: It's like $90.

Brokamp: The Star Wars Enterprise, of course.

Gates: Yeah, it's like $92 or something like that. So you could buy multiple shares of Disney. Yes, I think you should invest that money and get started. One tip -- consider something like Robinhood, which is free trades ...

Southwick: Right ...

Gates: ... so that you don't get eaten up by transaction costs, as Bro said. And just get started. Invest in Disney. Like you were saying, they own Star Wars now, so go nuts.

Southwick: We own Disney. Should I disclaimer that? We own Disney.

Brokamp: Sure, go ahead.

Southwick: You guys don't own Disney?

Gates: I do. Yes, disclaimer, thank you. I do own Disney.

Brokamp: I don't.

Southwick: You don't?

Brokamp: No.

Southwick: I guess you don't really love Star Wars as much as you were sounding like you did.

Brokamp: But you know, it's funny. In our last episode or two episodes ago, we talked about giving stocks for Christmas...

Southwick: Yes...

Gates: Love it...

Brokamp: ... and giving the stock and the product that it makes. I've been thinking -- and I'm going to propose this to my wife tonight, actually -- of doing it the opposite way. Looking at what we bought for the kids and then seeing which of those have stocks that we think are decent and then throw the shares on top of it.

Southwick: Aw! That's nice.

Brokamp: Yes. So given that I know that I'm getting Star Wars -related stuff for Christmas, maybe I'll get some Disney, too. Who knows?

Southwick: It always fits, man. It's always the right size. It looks good on you.