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.
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:
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:
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!
More in this series:
> Alan does not own any shares mentioned in this article.