Buying Stocks with a Limited Budget

Many people feel that until they’ve saved up a large amount of money, they can’t invest. In fact, even with a relatively small amount of capital, you will be able to buy stocks, but there are some limitations you should keep in mind to ensure that you have more chance of success.

Penny Stocks or Not?

With a small amount of capital, you may think that you can only afford to invest in penny stocks, but this is not the case. You should keep in mind that penny stocks are actually the highest risk stocks on the market. They seem attractive because a small rise gives you a large profit. If each stock rises from $0.10 to $0.15 they have risen 50%. While that is impressive, these stocks also have a high chance of leading to major losses. Consider the fact that if you invest $500 in buying shares, you will have $500 worth of shares no matter how many you buy. For example, if you buy 100 shares at $5 each or you buy 5 shares at $100 each, you will still have $500 worth of shares.

Beware of Commissions

The main obstacle in buying stocks for people with a limited budget is the costs of commissions and fees. Before you start investing in stocks, you need to look into the minimum deposit requirements and commissions charged by the brokerage account. These can sometimes be too high for those wishing to invest with a limited budget. You may decide to invest elsewhere until you have a larger budget or you can consider using an online discount broker, who will have significantly lower fees. This may be the difference between paying $250 per trade and paying $10 per trade! Even with the online discount brokers, it is worthwhile to limit the number of different stocks you buy in order to limit the commissions. However you did it, you need to take the commission into account when working out your overall profits and losses.

Consider CFDs

Because buying stocks can be expensive and may seem out of your reach if you have a limited budget, you might like to consider trading stocks using a security called contracts for differences (CFD). This means that instead of owning or short-selling the security, you trade the difference in the price of an asset. If you own the CFDs of shares, you only own the profit or loss from the changes in the price of the shares, rather than owning the shares themselves. This comes with limitations, but it allows you to enter the market even though you are low on capital.

Start Trading with a Limited Budget

While trading is commonly seen as an investment option for those with a large budget, it is possible even for people with a limited budget to buy stocks. Make sure you pay attention to the commissions and fees charged by the broker and that your capital can handle the minimum deposit requirement before you get started.