Advise if You Want to Start With Little Capital in Stocks

Many of my readers have sent me questions, which is – they are new to the stock market and want to start with little capital dealing in stocks.

Hi Mate, I’m a newbie to the stock market and want to start out with little capital. What would you advise I do?

I may sound like a broken record in answer to this question. However, if my brother wants to start into the stock market as a new trader and investor, you can rest assured I will advise him the same.

All Stock Tips are Fraud

You will often hear from tele-callers that you can make 2 to 4% on their intraday trading tips.

For calculation sake, if anybody can make 0.75% per day, he can be among the top one thousand wealthiest people on this planet in a matter of 5 years.

See the calculations in this answer on Quora.

• Starting Capital: $1000
• Money after 1 year: $15,291
• Money after 2 years: $233,824 (Top 1%)
• Money after 3 years: $3,575,485 (Top 0.1%)
• Money after 4 years: $54,673,897 (5,000 people have this much)
• Money after 5 years: $836,036,106 (900 people have this much)

So next time you get those stock tips, take it as nothing mere than a joke.

I agree, there will be a period when you may double your money in a given year. However, you have to remain invested in an uncertain time as well. So you may not be able to repeat those returns for an elongated period.

Ideally, aim for returns in the range of 15 to 20% of the capital invested.

So What’s Next

When you don’t have someone to suggest you stocks for trading or investing, there is only one way out, and it is you have to do the research.

The first step is to know the right stocks to invest in. You can use my way of doing it, which I have shared in these articles:

• 9 Investment Checklist I Follow Before Investing In Any Stock
• Fundamental Analysis – What we all know is completely wrong

Once the stock qualifies on the above checklist and analysis, I Evaluate the business following my investing rules.

And then use the earnings ratios to evaluate the stock further.

Finally comes the understanding of technical analysis based on price action to invest at the right price in the stock.

I have explained the same process in much detail in my book – Right stocks at the right price and for the right time.

Stocks and Little Capital

When you want to start with little capital, it isn’t easy to dedicate so much time and effort on stocks.

Moreover, it is not even fruitful for investors in absolute terms.

Let me explain how.

Let’s say you want to invest with ₹2Lakhs in stocks.

At an 18% return, you will make roughly ₹3k per month, or it is ₹100 per day.

Now, if you invest in mutual funds, it saves you a lot more time and hassle of understanding the right stock, tracks their quarterly results, follows the news, etc.

Now even if you don’t select some of the best funds and make below mutual funds returns of only 9%, you still make ₹50 per day.

So for an extra ₹50 per day adds too much of hassle for an investor in the market.

Now assume your investment is ₹20Lakhs, then in absolute terms, everything becomes 10x. The difference one makes ₹500 per day or ₹15k per month.

In absolute terms, the amount of money one makes has increased from ₹100 per day to ₹1000 per day or ₹30k per month, which becomes a considerable amount for an investor to dedicate time to stocks.

Stock Vs. Mutual Funds

You will see similar views in my article where I have shared Why I Avoid Investing in Mutual Funds, but You Shouldn’t.

As an investor, if you can beat the mutual funds return by at least 10%, and if the invested amount is above ₹5Lakh, you should consider stocks but not otherwise.

When you make 10% more in stocks as compared to mutual funds, the absolute amount on a ₹5Lakh is ₹50k per year or ~4k per month extra.

So it makes sense for an investor to consider investing in stocks over mutual funds.

I follow a straightforward strategy of making a decent return from the market. It doesn’t matter if I do it or a mutual fund manager does it for me.

Because I have an extensive portfolio, it makes sense for me to invest in stocks directly. However, for those who don’t have significant capital, it is not a feasible solution.

However, if you want to test the water with less capital and grow your investment with success, then it is altogether a different ball game. However, I still recommend people to opt for paper trading instead of investing with real money in the market.

Final Thoughts

If you were my younger brother who wants to start trading and investing in stocks with little capital, I would recommend you to go to the mutual fund’s route first.

Still, my advice will be to avoid day trading, never play on margins, and Futures and options aren’t for a retail investor like you and me.