Investing Basics: Before You Begin Investing In Stocks

investing in stocks

How Much Money Do You Need Before You Start Investing In Stocks?

If you plan to start investing in stocks to grow your savings and get the most out of your investment, you may wonder just how much money you will need to start? CNN Money answered this question when asked by one of their readers.

Here is that brief but helpful answer.

investing in stocks

This is one of the most commonly asked questions from CNNMoney readers. Many people want to become the next Warren Buffett, but they don’t know where to begin investing or even how much money they need to make the first purchase.

Short answer: $5.

Better answer: $500, and only AFTER you have built up your emergency savings.

“We really encourage people to have six months of savings first,” says Yvette Butler, president of Capital One Investing. Once you have a few thousand in savings, then you can start investing.

The goal of investing is to make your money grow faster than it would in a typical bank account (especially since savings accounts barely spit out a little more than 0% interest now). But investing is risky. You can lose money, especially in the “short run.” – CNN Money 

When Should You Start Investing in Stocks?

Once you have enough money saved so that your 6-month emergency fund is set and you have money available to begin investing in stocks, there are some important concepts to understand. The one we want to explore today is the power of compounding. This well-used term is important to understand because it is at the root of the power of investing.

Once you understand compounding, you will see why financial advisors encourage people to begin investing early.

Start Early – The Power of Compounding

Another reason why Millennials and young families should start investing as early as possible is the power of compounding. If you aren’t familiar with the concept of “compounding” returns, it is when you earn a gain on your principal the first year, and then begin to earn returns on your previous returns.

For example, if you invest $1,000 and earn an average 10% return annually, your investment will grow to $1,100 after the first year. After the second year, you won’t just earn another $100 but $110, for a total of $1,210. And the third year you will earn $121 for a total value of $1,331.

On a small scale, this doesn’t seem like much, but assume you invest $1,000 per year for 30 years and average a conservative 8% return. Instead of having $30,000 in a checking account, you will have accumulated a little more than $132,000.

Now let’s make this more realistic – assume you have a Roth IRA and you contribute the maximum (for your age) $5,500 per year for 30 years. At an average rate of return of 10% annually, you will have nearly $1.1 million dollars. But here’s why investing as early as possible is essential – if we change the number of years we’ve invested from 30 to 25, we only end up with $654,000 in retirement. Those final 5 years of investing on a large capital base comprise a significant amount in terms of gains and mean the difference between a comfortable retirement and a strained one.

Compounding returns are critical to investors because they allow you to turn small principal contributions over a long period of time into large nest eggs. Keep in mind that Albert Einstein called compounding interest “the most powerful force in the universe.” – Lifehack

When do you plan to begin investing in stocks?

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