How much you need to start investing in the sharemarket

If you only have a small amount of money to invest in shares, don't be put off. You can start on the investing journey with small chunks of money.

Rather than waiting until you have built up a couple of thousand dollars to invest, it is better to take action with a small amount - and lock it away, particularly if you are easily tempted to raid your savings.

Investing small amounts into the sharemarket suits investors such as parents and grandparents who want to put funds aside for when the babies grow up. Also for young adults starting out in the workforce who want to invest.

The minimum amount you can invest in shares is around $500 for your first transaction but depends on the amount set by your broker. They can vary. Online brokers are typically cheaper than full-service brokers. Brokerage starts at around a low $10 for each share transaction.

Some brokers allow smaller investments after your first trade.

With record low interest rates, your money does not accumulate very fast in the bank. But bear in mind the sharemarket can shrink your wealth very quickly in the wrong market conditions.

One of the downsides of investing small amounts into the sharemarket is that the brokerage for each share transaction (buy or sell) eats into your return. Take a $500 share investment for $10 brokerage. This amounts to 2% of your $500 and means that your share investment has to rise by that amount to break even. The ASX will not allow a transaction below $500 in shares.

If you invest a bigger amount of $2000 in one transaction, the $10 brokerage is a smaller 0.5%. The ASX suggests you should start your share investing with at least $2000 as a general guide. Instead of just one transaction, with that amount you could buy shares in four companies at the $500 limit, costing $40 in brokerage. But even with four shares that would be a risky portfolio because it lacks diversification. Concentrated portfolios can perform very differently to the main market index. It's no fun to read that the market is up 20% over the past year, when your narrow portfolio has gone backwards.

If you have a small amount to invest in shares, you should consider buying a diversified investment rather than a small number of different shares. One reason for this is that you only have to pay one brokerage fee. But the main reason is that diversification dampens the risk of your investment. If you hold the ASX 300 through an exchange traded fund, if ten stocks plunge, the impact is a lot less than if you held 20 stocks and 10 fell.

When you buy an exchange traded fund you are deciding to invest generally in the sharemarket. When you start buying individual shares you are instead backing your ability to identify which shares will outperform the market. Even experts who do that for their day job struggle to succeed, so be realistic.

Get stories like this in our newsletters.