There’s a common belief that if you want to make money in the stock market, you’ve got to start with some pretty big bucks. The myth is based on two common beliefs:
- Stocks are Too Expensive to Buy With Little Money. Some argue that with Amazon.com trading at more than $3,000 per share, Alphabet trading at around $1,500 per share, and Facebook trading at more than $250 per share, many of the big names are too expensive for the average investor to afford even a single share.
- Brokers Require High Minimum Deposits. Some believe that even if they had enough money to purchase stock in the big names, brokers wouldn’t let them unless they had large sums of it.
These ideas couldn’t be further from the truth. With the technological innovation made in the investing sector over the past few decades, investing has become accessible to every level of investor with every level of initial investment. Discount online brokers and trading platforms have gone to great lengths to make this possible.
Today, online brokers like Robinhood and Webull have given up commissions on trades, offering trading at the cost of fractions of a penny charged by regulatory authorities like FINRA. Many online discount brokers like Stash will even allow the purchase of fractional shares with a minimum investment of just $1, offering further access to large blue chip stocks with high costs per share.
Facts Behind This Myth
As is the case with most myths, the myth that you have to have a huge account balance to make any money in the stock market is somewhat based in fact. Before the days of the online discount broker, access to the market was limited.
Prior to the 1970s, access to the stock market really was geared toward the affluent. During these times, the best way to access the market was through a full-service brokerage. Not only did these brokerages charge high commissions for each trade made, but they also charged a fee equal to a percentage of your portfolio dollars for their advice.
To add to the accessibility issues, these firms only wanted to work with people who had quite a bit of money to invest. So, these full-service brokerages would put high minimum deposits in place to weed out the investors that they couldn’t make as much money from.
The first discount brokers, Vanguard and Charles Schwab, didn’t come around until the 1970s and 1980s. When they did, they changed the game. With lower minimum portfolio balance requirements and reduced fees, these brokers started a trend of stock market access that would change the investing landscape for the better.
How Believing This Myth Costs You
Some myths are fun twists on historical facts that don’t seem to have any consequences. This isn’t one of them. A widespread belief that you need a lot of money to make money in the stock market can be damaging to average investors in the long run.
Missing Out on Compound Returns
The beauty of investing is the incredible power of compound returns. Allowing a myth to delay your entrance into the stock market robs you of these compound returns, ultimately costing you thousands of dollars.
Compound returns is a term used to describe the act of reinvesting gains to expand earnings in the stock market. For example, if you were to invest $100 in the stock market today and earn the average historical rate of return, by the end of the first year of the investment, you would earn just over $10.
Simply earning $10 per year for 30 years would come to $300 in gains. But if you reinvest the gains each year and let compound work for three decades, by year 30 your total gains would come in at $1,786.
That means that, in this example, compound gains on an investment of just $100 would add more than $1,400 to your overall gains throughout this period.
Imagine if you were to invest $100 per month over the course of 30 years. Your contributions during this period would total $36,000. However, thanks to the power of compound gains, your $36,000 would turn into about $218,498.
How Much Money Waiting to Invest Actually Costs You
Compound returns in the stock market are a real driver of wealth, but what happens when you wait to invest because you believe that you don’t have enough money to get started?
Using the example above, including a $100 initial investment and $100 monthly contributions, if you waited for just one extra year to get started and only had 29 years to invest, your ending balance would come to about $197,031 instead of $218,498. That’s a $21,467 loss as a result of delaying your initial investment by just one year.
If you were to delay your investment by five years, your total after 25 years would come in at about $129,396. That’s a loss of $89,102 that could have been realized over the course of those extra five years.
That’s the cost of believing this myth — $89,102 is a lot of money. It could mean the difference between a comfortable retirement and having to scrape to make ends meet in what should be your golden years.
Having to Break Bad Habits
As a human being, you are a creature of habit. Once a habit is formed — whether good or bad — it’s extremely difficult to break. This basic human nature serves to exacerbate the dangers associated with the myth that you need to have a lot of money already in order to invest.
Under this belief, many people delay investing. Not only is this delay costly in terms of lost compound gains, but it’s also dangerous from a lifestyle standpoint. After all, when you delay investing, you’ll likely spend the money you might use to invest in other ways, creating unhealthy spending habits.
By the time you realize that you should start investing, you feel as though you don’t have any money in your budget for the process. At this point, before you have money to invest, you will need to break unhealthy spending habits to free money up, further extending your delayed market entrance and reducing your potential to earn through compound gains.
How to Free Up Funds for Investing
If your lifestyle won’t allow you to get started with investing because you don’t have any extra money in your budget, how do you free up money now to take advantage of compound gains? Get creative.
For example, think about cutting some of the following monthly expenses:
- Brew your own coffee instead of buying expensive restaurant coffee.
- Cut the cord on cable TV and other entertainment subscriptions and use lower-cost alternatives like Sling TV, Hulu, or Disney+.
- Save on energy costs by adjusting your thermostat or making energy-efficient home improvements.
- Save money on restaurant spending by adjusting where and how often you eat out.
If you took advantage of just the savings opportunities listed above, you could add hundreds of dollars to your budget for investing on a monthly basis.
If that doesn’t sound like much, remember that compound is on your side. If you started with an initial investment of $500 and contributed $500 per month to your investing portfolio, your portfolio value has the potential to grow to more than $1 million over the course of 30 years. So, making these small lifestyle changes and investing the resulting savings has the potential to turn you into a millionaire over time.
Imagine what you could do if you became even more creative about saving money for investing.
How to Start Investing
Now that you know how valuable it is to begin investing early and how to free up some funds, it’s time to start putting your money to work. What do you do if you don’t know where to start?
In an effort to get in on compound gains quickly, if you don’t know much about the market, start by putting money into a robo-advisor. Companies like Betterment and Acorns offer full-service investment accounts that are simple to use. All you need to do is deposit funds and let the robo-advisor do the work of picking investments for you.
Taking advantage of these types of services gives you the ability to start building returns immediately instead of waiting until you learn more about investing in general and building out your own portfolio.
Once you’ve started your account with a robo-advisor, it’s time to start researching investing and how it’s done. As you become more knowledgeable about the investing process, you can start investing your own funds in an attempt to outpace returns provided through your robo-advisor, or simply choose to stick with your current plan if it’s working out for you.
No matter what you do, the important part is starting now. Don’t wait until tomorrow, next week, or next month. When you’re finished reading this article, your next move should be putting money in the market and taking advantage of the compound returns that your investments will create.
Pro tip: When you sign up for an Acorns account, they will give you a $5 bonus after making your first investment.
Many young people aren’t concerned about getting started in the world of investing. By the time they think of retirement, they’ve lost tens of thousands — or even hundreds of thousands — of dollars that compound gains from investing earlier would have generated for them.
Don’t be one of these people.
The fact is you don’t have to have a ton of money to start investing. Allowing this myth to delay your entrance in the market will cost you more money than you’ve ever imagined in the long run.
Many online brokers allow you to get started with $100 or less. Some let you start investing as long as you’ve got $1 to start with. So, don’t hesitate — give your retirement a fighting chance and start investing today.
Do you invest? At what age did you start investing?