How Much Should You Invest?

Published in Investing on 4 May 2012

What is the sensible minimum investment amount?

In our Investment for Beginners series so far, we've examined the mechanics of buying shares and have considered the costs of transactions and taken a look at the tax you'll be liable for (much of which can be escaped by using an ISA).

This time, we'll think about regular savings and the amounts of money you really need to make a share purchase.

Online brokers provide an easy mechanism for making direct transfers from your registered bank account. In addition, most will set up regular monthly transfers for you, usually from as little as £20 per month. So you could, for example, save a small amount regularly, and then whenever you have a bit extra you'd like to invest, transfer it yourself. And when you have enough, you can go ahead and make a share purchase. But how much is enough.

That's all down to the charges really. The more shares you can spread that £10 fee across, the more cost effective your purchase will be and the less you'll need to see the price rise to break even. These days, most people would consider around £500 to be a minimum amount, though depending on the chosen share, the spread in the buy/sell price can make a difference.

An example

Suppose we're buying shares in Vodafone (LSE: VOD), at the price we saw when we looked at the mechanism for buying and selling, and let's say we have £500 to spend. At the price of 171p per share, the deal would look like the following:

285 shares£487.35
Stamp duty£2.44
Commission£10
Total£499.79

If we then immediately sold those shares, we'd get 170.95p each for them, and would have to pay £10 in fees. We'd get back £477.20, having lost £22.59 -- so that's the amount we'd need the value of the shares to rise by in order to break even.

We'd need to see the price we can sell at rise to 178.87p for that to happen, and after paying our £10 fee, we'd recoup £499.78.

So that's a rise of 4.6% in the share price needed to recoup our initial investment, before we move into making any profit.

Up for another one?

But what if the spread is greater? Looking at Coastal Energy (LSE: CEO) again, with a spread of 975p-1,000p. What we'd have here is:

48 shares£480.00
Stamp duty£2.40
Commission£10
Total£492.40

To break even on that one, we'd need to recoup that £492.40 plus £10 selling fee, which means our 48 shares would have to go for 1,047p apiece (to the nearest penny). And that's a much bigger 7.4% price rise needed to break even.

Over to you

If you fancy an exercise, try working out the percentage gain you'd need to make to break even in these two cases if you invested £1,000 instead of £500 -- and tell us your answers below.

Hopefully, you'll see two key lessons here. One is that the bigger the spread, the greater the gain you'll need to move into profit, so that should figure in your decision on the minimum amount you'd invest. And secondly, hopefully it will be clear that buying and selling too quickly can kill your returns -- making that break-even 4.6% over the first year is much more plausible than making a gain like that, say, every month.

Baffled by shares? This special report -- "What Every New Investor Needs To Know" -- can start you on the path to investing. What's more, the report is free!

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> Alan does not own any shares mentioned in this article.

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Comments

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apprenticeDRL 04 May 2012 , 1:01pm

Dont forget the dividend. When buying a long term value share I try and make sure that the purchasing cost of the share (fee and stamp duty) are at least covered by the next dividend payment, this calculation will give you your minimum purchase price.

In your Vodaphone example the dividend paid on 3rd Feb was 3p (ignoring the special dividend). Therefore on 285 shares you would get a payment of £8.55 ( - the 10% Gordon Brown tax). If your charges are 12.44 for me the minimum share purchase in Vodaphone would be 416 shares (£712 + stamp duty and fee).

Just a different way of looking at it but it works for me.

Obviously this doesnt work for AIM growth shares but in that case you are expecting a large increase from the price you purchase.

ANuvver 04 May 2012 , 2:42pm

4.6% "in and out" costs on a £500 trade is pretty steep when we complain about getting scalped on commissions, management fees and so forth. Particularly if you're talking about a blue chip, which by its nature is going to have a more stable price.

Everyone will have their own minimum of course, but awareness of "in and out" costs as a percentage can focus the mind and encourage patience.

A clear benefit of a higher minimum trade (in your own personal context) is that you have to wait for funds to build up. So you have more time for window shopping, you're less inclined to be blown around by market fashions, your research tends to be broader and more thorough and your trigger finger less itchy.

Investors have to look for opportunities to control what little is actually controllable. Costs are.

rober00 04 May 2012 , 4:04pm

Spread is an important consideration. There is one Investment Trust I very much would like to buy but with a spread of 10%+ it is much, much to rich for my blood.

AleisterCrowley 04 May 2012 , 4:38pm

If buying at full cost (£10-£15 a trade), and ignoring stamp(!!) I reckon £1500 is the minimum. Just a rule of thumb.

15551 04 May 2012 , 5:35pm

my minimum is £2,000. Although I'm not purchasing individual shares, but investment trusts

JohnnyCyclops 05 May 2012 , 9:13am

One point not mentioned is using cheaper or free commission buying. Also, as I'm usually investing for the long-term and holding the share for dividends, I'm less focused on the selling costs.

For my Stocks & Shares ISA I used iii (there are other ISA providers!) which offers a once-a-month day with £1.50 commission, not the usual £10 (it's still £10 to sell). So on £500 that's £4.00 (£1.50 comm + £2.50 stamp duty) or 0.80% to buy. At £1,000 this goes to £6.50 (£1.50 comm + £5.00 stamp duty) or 0.65%. Above £1,000 there's not much further gain in the total costs - a £10,000 block would be £51.50 (£1.50 comm + £50.00 stamp duty) so 0.52% - i.e. you reduce costs 0.15% moving from £500 to £1000 purchase blocks, but only a furher 0.13% going from £1,000 up to a potentially whopping £10,000.

But, the cheaper £1.50 is limited to buying on 23rd of each month - which might not be an optimal day to buy - although otherwise I'm tempted to time the market. Otherwise, at the £10 commission I'm at 2.50%, 1.50% and 0.60% respectively at £500, £1,000 and £10,000 - still more gained going from £500 to £1,000, than £1,000 to £10.000.

So if I'm looking to buy £1000 of a stock I have to consider do I wait until 23rd of the month and buy at 0.65%, or buy in real time at 1.50%. My consideration is do I believe the price might be down by the differential of 0.85% - perhaps some Euro-wobble affecting prices in the short-term - that means I'll buy today for the full £10 commission, in the expectation the share price will increase by at least 0.85% to justify not waiting for the next cheaper buying day on 23rd.

I played around in a spreadsheet looking at ratios of costs to investment blocks. I'd recommend you doing the same to understand where you're comfortable investing. For long-term buy & hold (LTBH) I'm at £500 if I can buy on a cheap day, or more generally £1,000, but that's also reflective that I'm trying to build an ISA portfolio of 15 to 20 companies, so £1,000 each will build up nicely over a couple of years. At £2,000 per company it would take twice as long to get a diversified portfolio together. Later on I can go back around my portfolio and add further £1,000s to 'double up' holdings, at not much more commission costs.

I dabbled in trying to trade on a FTSE100 ETF (ETFs are commission only, with no stamp duty, so slightly cheaper again). I learned here that to buy and sell quickly, made no sense at less than blocks of £2000 (where £10 in, £10 out, no stamp, meant 1.00% costs - a 3.00% price rise would give me a 2.00% net return). Trying at £1000 has 2.00% costs - and that extra 1.00% erodes too much of the potential trading gains to be had. At blocks of £4000 that £20 drops to 0.50% but doesn't improve more at bigger blocks.

Hope this helps new investors. I'm not a total rookie, but have been seriously looking at investments - and investing - over the last 18 months, so I've been learning by doing.

Regards
John

Hannibalis 05 May 2012 , 10:44am

Clearly it will depend on how much you have to invest and what proportion that represents of your portfolio, to ensure reasonable diversification. My preference is for single lump-sum investments, with a minimum of £2.5 to £3k but rising to £10k+ for some corporate bonds, where there are minimum quantity rules.
Basically, if you are worried about spreads and commissions, you are probably investing too small a sum. Instead, put your monthly spare cash in a Saver Account and earn a good rate of interest, then invest in an ISA or SIPP.

http://www.the-diy-income-investor.com/2012/05/portfolio-performance-vs-professionals.html

jaizan 05 May 2012 , 4:40pm

For someone starting their portfolio with (say) £5000, perhaps a reasonable minimum would be £1000 per stock, giving five stocks & a balance between diversification and trading costs.
If that person's going to add extra funds soon after, then perhaps they should divide that £5000 into three portions, on the basis diversification will soon follow with subsequent purchases.

Someone with a 10 year old ISA might be thinking of trade sizes of £5000 & sometimes topping up a holding with sums of £2~3000.

goodlifer 06 May 2012 , 11:59pm

What is the sensible minimum investment amount?

Ideally, £300 or so a month.
My regular investment account charges £1.50 per deal, 0.5%.

More would obviously be better, and a bit less might be better than nothing.

wjs501 08 May 2012 , 5:13pm

I'm pretty new to investing, only been putting money into my isa since I started work in october. So currently I can't afford to put a significant amount into the market each month.

Most of my shares I've bought have been at around £500 worth. Mainly with the iii regular investing £1.50 commission and a few at £10 full price.

I'm in for the long term and intend to add to these holdings as I earn more money, I've noticed the effect that commission has on my returns so am trying to increase my average buy but on the whole I think the ability to have a more diversified portfolio and the also the fact that I think I'm learning more through these small investments that I perhaps would if I saved my money up to buy in one lump sum.(also potentially dollar cost average comming into play once I eventually start adding to my existing holdings). I'm hoping that what I learn now by investing in £500 chunks puts me in a good postion when I hopefully can afford to be investing £5000 chunks! If I was investing all my money I have now(5 grand in the ISA) and wanted to minimise my costs I'd wack it all into the same Investment trust, and wouldn't be learning what I am now .

goodlifer 08 May 2012 , 9:50pm

wjs501,

What you say seems good sense to me.
All one's decisions have to be some sort of a compromise - there don't seem to be any idiot-proof recipes.

Pinchthepennies 04 Jun 2012 , 12:37am

Hi Everyone,
Just been reading up on this series and your comments and I have a question that hasn't been asked / answered yet:

The examples above work on the assumptions that you buy an amount of shares of a company and sell them at a later time. So far, so good.

My question is this:
If I buy shares of the same company to different prices throughout a period of time how do I work out my break-even price? Do I take an average of the prices paid for these shares or do I take only the highest price paid or is there any other way of working this out?

Thanks for your help and time.

RobinnBanks 14 Jun 2012 , 11:53am

@Pinchthepennnies

Add up all the money paid including charges and divide by the number of shares purchased to give your average purchase price.

Pinchthepennies 14 Jun 2012 , 4:59pm

@RobinnBanks,
Thank you very much - much appreciated.

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