How to invest in stocks with low funds

Blog | Investing

Stock markets are a great tool to create wealth. More the money you invest in good quality stocks and let it compound for long, more wealth you create in the long-term. But not all are fortunate enough to start with a large pool of capital. If you have a small corpus to start with do not lose heart. Most of us earn at regular intervals– salary. It is the sole source of income, savings and capital for investments.

Though you may have a small amount, you can start investing in stocks. In India, you can start with buying just one share of a company. This may cost you a few hundred rupees. For example, to buy a share of HDFC Bank you need around Rs 1600 and to own one share of ITC you need Rs 113. This excludes statutory costs such as exchange levies and securities transaction tax along with brokerage payable.

You can identify a basket of stocks and keep adding them at regular intervals. This helps you buy sizeable quantity of shares over a period of time. This approach has benefits. You can keep monitoring the stocks you bought. As you keep adding to your positions, you can also review your investment thesis and take corrective steps if necessary. Since you have small positions in initial months, any mistake won’t cost you big. If your investment premise works then you can keep adding shares.

Though it may be a tempting idea to use leveraged funds to take large positions, it may not be the best thing to do for beginners. For lack of experience in handling the volatility, some of us may capitulate. Sometimes an investment idea does not play out in desired time frame. In some cases it totally goes wrong. In such a situation, if you have borrowed money to invest, you are in a vulnerable position. You lose money in stock and then you have to pay interest to the lender along with capital.

In case you have small amount of capital, then it is better to avoid trading in Futures and Options (F&O). It is also called derivatives market.  Derivatives are leveraged positions wherein by putting small amount, you can take a larger position. In the initial period of investment, some traders buy out-of-the-money options due to the small premium they charge. They consider these options like a lottery ticket without understanding the functioning of derivatives markets. Such hope trades rarely pay off. In most cases, investors end up losing whatever capital they have.

Hence, it is perfectly alright to start small. Make sure you stick to your investment plan. Avoid taking short cuts to grow big. Protect your capital and grow it by leaps and bounds with the help of quality stocks over a long period of time. Quality stocks, which have been in existence for a long time and which are market leaders in their respective sectors, are likely to provide you encouraging returns in the long-term. It is important to understand: it is not the amount of capital you invest that determines the returns of your investments. It is the selection and amount of shares of quality companies which determine the returns of your investments.