How to Start Trading with Limited Funds

Elena Velikova

July 28, 2017

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Are you ready to take the leap and start trading equities or forex? Many beginners build up a lot of excitement about trading, only to be disappointed when brokerages turn them down because they don't have the required minimum investment. While this may be a problem for someone who wants a traditional full-service broker, you don't need $25,000 or even $5000 in cash to start trading - in fact, you could probably start with $50 or $100 a month. Here's how.

The More Trading You Do Yourself, The Less It Will Cost You

One of the reasons for high fees and large minimum deposits at traditional brokerages and firms is the amount of time these brokers have to spend advising their clients, persuading them to take risky trades with potentially high rewards, and keeping them informed about new developments in the financial markets. If you know how the markets work and stay up to date on financial and political news, you won't need any of that - and you'll pay a lot less in brokerage fees.

Instead of being frustrated because you don't have a large amount of cash to invest, spend some time educating yourself on the markets (most information is available online, and it's usually free), and choose a reasonably-priced online brokerage which allows you to control your trades, take responsibility for your investment decisions, and pay lower fees. There are some excellent platforms out there, like Stern Options which offers great investment analysis tools, tight spreads and competitive fees - those are the brokerages you'll want to work with.

Avoid Funds at the Beginning - or Choose an ETF

When you're starting out as an investor, your first instinct may be to find a good, well-managed mutual fund or other investment vehicle that has stood the test of time. This makes excellent sense for a high net-worth investor who has tens or hundreds of thousands of dollars to invest and doesn't mind paying commissions, but if your portfolio is worth less than $5000, the fees involved are probably way too high.

If you're cautious about picking your own stocks, as many new investors are, the best solution may be an exchange traded fund (ETF). These funds can be bought and sold like shares, and usually, attract the same kind of brokerage fees as normal shares and equities. While you'll be paying lower fees to buy and sell ETFs than you would to buy into a mutual fund, you should still bear in mind that an ETF isn't likely to move dramatically up or down in a day, week, or even a month - these are usually medium to long-term investments.

If you'd like to include some buy and hold strategies in your portfolio, an ETF may offer you the peace of mind that comes with a managed fund at a price and brokerage fee that makes financial sense for your portfolio size.

Set Aside a Monthly Investment Budget - and Keep Investing It

Some would-be investors never get around to buying their first share because they haven't saved an investment lump sum yet. Unfortunately, while they are waiting to save it, inflation and other events in the economy eat into the value of their savings and make daily life more expensive - and they end up not being able to save their lump sum after all. Fortunately, there's a better way to start investing, and it's really simple - put away as much money as you can spare each month and buy shares with it. Whether it's $10 a week, $100 a fortnight, or $200 a month, every cent you invest wisely will boost your net worth over time.

Don't Borrow Money to Make Investments

One of the best-kept secrets of the financial industry is that the best returns aren't made by investing - they are made by lending people money. The interest you pay on your credit card is probably higher than the interest on any savings account you've ever heard of - and even higher than the returns you're likely to make on a balanced portfolio. For this reason, it's essential to pay your debts in full before you start investing - and never borrow money to make investments.

Use the Power of Compound Returns

Some investors aren't aware that $100 regularly invested each month can make them richer than $100,000 invested during the last few years of their working life. The reason for this has to do with compound interest - or compound returns on investment. If you make a 10% return on your $100 monthly investment each year for 25 or 30 years, you'll end up with hundreds of thousands of dollars, because you're making 10% compounded by 10% thousands of times over. Some people end up with a mountain of debt from a small student loan or credit card bill due to owing compound interest, but you can turn the tables and make your investments grow at the same fast pace. The sooner you start, the longer you'll have to watch your portfolio grow.

Always Diversify

There's no way to avoid commissions, brokerage fees and taxes, but the one thing you can gain for free is a diversified portfolio. Simply put, if you invest in a range of assets - including shares, forex, physical property, a pension fund and treasury bonds - you're more likely to make sustainable gains as the markets experience their ups and downs. By not putting all your eggs in one basket, you'll protect and grow your wealth - and protect your financial legacy into retirement.

Conclusion

Starting out as a trader isn't something that's reserved for people with thousands of dollars in the bank. By using the tips we've offered you in this article, you could be on your way to building a portfolio in a matter of weeks and investing your way to financial freedom. Once you have a good understanding of the markets, don't put off the decision that could give you the lifestyle you deserve - take the leap and become a lifelong investor today. You'll be embarking on a journey of learning, strategic thinking, and financial empowerment that could give you the freedom to live the way you always wanted to. All you need to do is start.