A question which often comes up, is how much money do you realistically need to start investing in the stock market, and how risky is it to invest a large amount of capital in the markets. All risk is relative, are we talking crossing the road without looking, or going on a date with a guy who has just come out of prison for multiple domestic violence offenses? It’s not just about investing in stocks, it’s investing at a level which offers worthwhile returns in both the medium and long term. There are plenty of other investment opportunities around; real estate, classic cars and even setting up your own business; so what’s the advantage to investing in the stock market with a relatively frugal amount of starting capital?
Would for example, $10,000 be enough money to start investing in the stock market? You bet it would, and many of the most successful traders around started with much less than this amount. In terms of investing, this kind of starting capital is still considered loose change so you will most certainly require a healthy appetite for risk, alongside a little luck to get your feet on the ladder. Luck is mentioned here, and it is most certainly relevant because you may just have got lucky in the lottery of life and discover yourself to be a naturally gifted trader; it’s quite rare, but some people’s brains are simply wired perfectly for extracting every last cent out of the financial markets.
If you are just out of college and looking to invest for the long-term, with an aim of building a 7 figure account size by the time you hit your thirties, then that makes you a lot more ambitious than most. This is certainly achievable through compounding profits, but requires a degree of patience which is probably rarer to find than it is a naturally gifted trader. If this is your strategy then you will be looking to set up a risk averse portfolio and trade exactly as the professional hedge funds manage their accounts, aiming for anywhere between 5%-20% returns annually.
For anyone else who is looking to make substantial returns, say, within the next 5 years or so then you’ll need to play the game slightly differently and set your sights a little higher than the 20% returns the hedge funds would be dancing around their paperweights to achieve. My advice to achieve this would be by placing the majority of your funds in a well-rounded portfolio, and then use what’s left over to make some very well calculated bets on volatile markets such as gold, crude oil and S&P futures. To trade in this format you will need to learn the art of price action, chart formations and keep a close eye on global economic news events.
There is no way around the fact that if you wish to make considerable returns and become wealthy as a result of investing in the financial markets then you need to be a highly accomplished trader, there’s no way of achieving what you are aiming for unless you reach the very highest level. The slow and steady approach is fine if you have $100k, a modest trading strategy which is risk averse, and a 20% return would provide you with enough live on. With a $10k account that is not the case, and even by compounding returns it will likely take years to reach that account level.
Investing in the strategy mentioned involves setting up a balanced portfolio which you would expect to see any professional trader or fund have, and then using the returns to take relatively high-risk, calculated bets on volatile markets. It’s important to never compromise your portfolio and only use your profits for trading in this fashion. If you are capable of building a sound investment portfolio and are then able to master the art of day trading price action then it’s possible you could become extremely wealthy at some stage of your investing career. The key is to keep ploughing your short term trading profits into your long-term investment portfolio, and with this strategy running efficiently, you will find it doesn’t take long before you notice your compounding returns increase substantially.
"You can definitely set up an investment portfolio with $10k, and it’s down to how you manage that capital; how good you can become at trading the markets intraday is ultimately what will determine your overall success."
Whereas with property, cars and even (to a certain extent) setting up your own business all have fairly limited and predictable returns, investing your capital in the markets gives you the chance to become a millionaire in the shortest period of time. What’s more, trading in the markets forces you to learn economics and take an interest in what’s going on in the world around you, and there really is no substitute for having an interest in something when you are attempting to make money from it. You might be someone who takes to trading and investing like a duck to water, but this is something that you’ll never know unless you give it a shot.
There is of course a risk that the stock markets could crash, but then so could the property markets, or the market for classic cars. Everything with potential usually has a varying degree of risk associated with it, a sound financial advisor would usually ask questions along the lines of: how much can you afford to risk if it goes wrong, and what is the potential upside if it goes right. When you put things into context, everything is a risk; crossing the street is a risk, the difference with trading is the virtually unlimited upside potential, and that’s what makes this industry so appealing.