Weekly Q&A: Investors Ask, Clement Answers #5

For week 5, we got some very interesting questions - How much money do you need to start investing in stocks? What’s a stock index and what is it good for?
In addition, we got a more personal question for Clement about how he got into investing in the first place, which he particularly enjoyed answering.

Do you need a lot of money to start investing in the stock market?

Well, it depends on your definition of “a lot”.

First, many brokerages require a minimum deposit in order to open an account, so you may be limited in your choice of broker if you don’t have an initial sum to invest - which may lead to higher fees, eating at your already small capital.

Once you get over that hump, the size of your investment can affect what you can invest in, potentially leading to sub-par results. With a hundred dollars, there are a lot of stocks you won’t be able to invest in, and your portfolio will probably suffer from lack of diversification, if you do find a stock you like and can afford. Lack of diversification adds risk to your investment.

However, you don’t need hundreds of thousands of dollars in order to invest in stocks, either. A few thousand dollars are probably enough to create a well-balanced portfolio and get started.

I’ll add that before investing, it is a good thing to have an emergency fund in cash worth about six months of expenses, so if that’s not done yet - that should be your #1 priority. Don’t let a speed bump in the road drag you down, invest only when you are financially stable.

In simple terms, what is a stock index and why is it beneficial?

A stock index is an instrument that combines and aggregates the performance of a group of stocks.

For the sake of the explanation, let’s make up an index. Our index has two components, stock A and stock B. Let’s also assume the index is equally weighted, so stock A is 50%, and so is stock B.

On a given day, if stock A is up 1% and stock B is up 2%, our index will rise 1.5%, which is the average performance of the two stocks. On another day, if stock A is up 1% and stock B is down 1%, our index will not move, since the two moves cancel each other.

Now that we’ve explained the concept, look at the S&P 500, which is the index most refer to as the benchmark index. It has 500 US stocks, and moves every day according to the combined performance of all of its components. The S&P 500 index, unlike our made up index, is weighted - meaning that stocks with bigger market caps have a bigger impact on performance than stocks with smaller market caps.

Stock indices allow you to invest in an entire sector or country, instead of trying to pick winners. It diversifies your investment, and insulates you from an individual stock going bad. The odds of an entire country going bad is relatively low, making it a safer investment.

And for practical purposes, you can also often find ETFs very low fees that replicate indices, making it an attractive ‘set it and forget it’ kind of investment.

Can you share with us your journey investing in the stock market?

Well, I was always interested in finance, money, and the stock market. I was a thrifty kid, always hunting for bargains and good deals on anything I wanted to buy.

I was 18–19 years old a decade ago when the financial crisis happened. I remember seeing the carnage in the market, and realizing that there had to be some good stocks getting hammered because of the general fear attitude that ruled the market back then.

I love crunching numbers and digging in financial reports for nuggets of information that I can use to my advantage. I’ve always been more fundamental than technical. It always seemed more fact-based and real to me. The bargain hunter in me automatically made me a value investor. So I transitioned from buying a PlayStation on sale to buying shares of Sony Corp ADR (NYSE:SNE) when I felt they were on sale.

A little over three years ago, I joined Investing.com, completing the move from amateur to professional. I was the first financial analyst of the company. Today there’s more than a few of us, and we strive to provide quality analysis for our users.

Overall, I have to say there have been more ups than downs. Having joined the party as the financial crisis happened, I wasn’t hit by it, and the past few years have been pretty good in the market, with very nice yearly returns. I take a lot of pride and joy in my job and am happy that my early interest in money and hard work have gotten to where I am today.

If you have questions of your own you’d like Clement to answer, please leave them in the comments below or send them directly to Clement via Twitter - @ClemThibault.

Previous Q&A (4)