How Much Money Do You Need to Start Buying Stocks?

The answer is more complicated than you might think.Image source: Getty Images.

Technically speaking, there’s no minimum amount of money required to start buying stocks, as most of the best online brokerages don’t have a minimum deposit requirement to open an account.

While there are some apps that will allow you to own fractional shares of stock, these generally aren’t the best bet for investors looking to build a portfolio. So, for our purposes, the minimum you need to start buying stocks is the price of one share of whatever stock you want to buy, plus whatever commission they charge.

For example, if you want to invest in company XYZ which is currently trading for $100 per share, and your chosen brokerage charges $6.99 trading commissions, you’ll need at least $106.99 in order to invest in that company.

To construct a diverse portfolio of individual stocks

For practical purposes, however, you’ll want to have a lot more than the cost of one share before you open a brokerage account and start buying individual stocks. There are two main reasons:

First, if you notice in the last example, by purchasing one share of a $100 stock and paying a $6.99 commission, you are effectively paying a 7% commission rate. That’s excessive, even when compared to notoriously high-fee investment products like variable annuities. On the other hand, if you have $500 to invest, your effective commission cost drops to 1.4% of the purchase. With $1,000 to invest, your commission is only 0.7% of the purchase. With $2,000… well, you get the idea.

Second, it’s not a great idea to invest in just one stock. You’ll simply be too dependent on the performance of one company. For example, if 100% of your money is in Apple stock, you didn’t have a great fourth quarter in 2018 as the share price plunged from over $230 to below $150. If 100% of your money was in Lehman Brothers stock prior to the financial crisis, you got wiped out. On the other hand, if either of these investments represented just 5% of your portfolio when they went south, these events wouldn’t have been catastrophic for you.

I often suggest a minimum of 10 stocks for a properly-diversified portfolio. Using my own portfolio as an example, I own about 30 different stocks (and in full disclosure, I own shares of Apple).

While I’m hesitant to give a target dollar amount before you start investing in individual stocks, the best guidance I’d say is that you need to have enough to buy about 10 stocks, and to put enough in each so you don’t get killed by commissions. Aim for a target effective commission of 1% or less of each stock purchase.

An alternative way to invest in stocks with less money

While I don’t think there’s a specific dollar amount you need to buy individual stocks, it’s fair to say that the amount is well into the thousands.

Not everyone reading this has thousands of dollars to invest right away. If this is the case with you, it could be a smarter idea to start with ETFs (exchange-traded funds) or mutual funds, preferably index funds, which generally have low expenses. Not only can funds like these be excellent ways to get a diverse portfolio all in one investment, but many brokerages offer a selection of commission-free ETFs. These can form a nice base on which to start building a stock portfolio once you have a bit more cash available.

As a personal example, my brother called me and asked for my advice a couple of years ago. He was expecting about $2,500 back as a tax refund and wanted to start investing in stocks. My advice: Put the money in a broad index fund. Then, as you add more money to the account, add some individual stocks you have your eye on.

The bottom line is that you can get stock exposure in your portfolio without much money, but unless you have several thousand dollars or more, it’s probably best to get started by investing in index funds. As you start your investing journey, take a look at Motley Fool Money's guide to the best online brokerages for beginners to see what is right for you.