Rise and Fall of American Dream

The biggest question in front of any investor who enters stock market is whether i should start with a $5000 investment or $100 investment. Different investment gurus have different advice some say you should be conservative and careful in the beginning since stock market can be an evil place. Others say if you are entering stock markets make big betts diversify otherwise you will be killed. We believe the answer is somewhere in between.

First of all the investor has to make sure that they are being honest with themselves. How much money you are "saving" over having to pay the expense ratio of an index fund or low cost actively-managed value fund. If you are still coming out ahead, then great! You are doing very well! If not, that's okay too, but at least you know this and you then need to ask yourself if all this effort and time you are putting in is worth it to trail the market.

Big thing to keep in mind is expenses. If you buy in increments of $100 at a time and it costs $9.99 both to buy and sell the stock, you then have to make a 25% return just to break even on your commission costs ($100 principal - $10.00 to buy - $10.00 to sell = $80, $100/$80 = 1.25. Usually it is recommended that expenses don't take up more than 2% of your principal, which would put individual trades (on average) somewhere more around the $1,000 mark. So going by that $1000 is more practical. But yes, $5000 is probably ideal for beginners as it gives a little bit of room to absorb the initial losses if you happen to occur any.

Most big brand name brokers might be reluctant to tolerate that small an account such as 100$. Alternatives to that would be dividend reinvestment programs or Share Builder programs that accommodate small amounts. You can find more about these types of brokerage firms in our Fractional stocks tab.

That said, you don't want to be betting large amounts relative to your net worth "just to get some action going." If $1,000 is a significant amount of your net worth then you might be better advised putting it in an index fund or a low cost value fund like DODGX until you have larger amounts of principal to invest meaningful, but not excessive, percentages of your net worth on individual stocks. Always remeber never put all your savings in stock market. Always keep atleast 20% in cash format either in savings or money market account. This you would need during emergencies.

Another alternatives for small first time investors might be to try out some "fake" money investment tools like Yahoo finance. That will make you familiar with the process so you don’t end up with playing with your real money while you are still picking up the basics.

The bottom line is that it’s definitely encouraged to keep tabs on your investing expenses. Look at your commissions, Wall Street Journal, Morningstar, Value Line, Motley Fool, etc. subscriptions and add all that up to come up with your math to see if it is for you.