How much money do you need to start investing?

Investing in the stock market is an exciting but daunting concept. Putting your savings to work and earning some money sounds great, but some people don’t have a spare $500 just lying around. 

So, can you still invest in ASX shares with a modest sum? Good news! The answer is yes. Here’s what you need to know about transforming even a small amount of money into the start of an investment empire.

Is there a minimum amount to start buying ASX shares?

To execute a buy or sell trade on the ASX, most brokers require a minimum order value of $500. Some brokers are more lenient than others in this area, but $500 is typically the minimum amount.

In saying that, many unlisted investment vehicles, such as managed funds or investing apps, have different rules and will accept lower investment amounts. If $500 is too much for your own investing needs, this might be an area worth exploring. 

How can I invest a small amount?

To invest any amount of money in individual shares, index funds, or other investments, you’ll need to open an account with a broker.

Most of our banks (including the big four) have brokerage offerings. If you have an account with a bank, it may offer some perks to encourage you to invest with it. However, you may also want to consider an independent brokerage firm or an online-only or app-based broker. 

Bear in mind that investing small amounts at a time can eat away at your returns through brokerage fees. If you’re buying $500 worth of shares every month and your broker charges you $15 a trade, you’ll pay $180 a year to invest $6,000. This represents 3% of your total capital, which means your shares will have to appreciate 3% just to break even. 

If you only have small lump sums to invest, it might be worth waiting until you have parcels of $1,000 or more before buying shares.

When starting with a small sum, make sure the broker you’re considering offers the following:

• Low brokerage fees: ASX brokerage fees are still much higher than in the United States (where free brokerage is common), even though these fees have come down recently. However, there is still a disparity between what the major brokers charge for buy and sell orders, especially when it comes to international shares. So, do your research to make sure you don’t pick a broker with the highest fees on offer
• No minimum balance fees: Investments can go up, but they can also go down. Even if your initial investment amount is higher than the broker’s threshold for a ‘low balance’ fee, you might wind up beneath that threshold down the line if you invest in a stock that drops. 

What is the right amount to invest?

There’s no ‘right amount’ to start investing in the stock market. It depends on your personal financial situation and investment goals.

If you have a lot of money sitting in a savings account and you’re interested in saving for retirement 30 years down the road, your right amount will be very different to that of someone who has maxed out their credit cards and is saving a deposit to buy a home in five years’ time. So, while you can invest any amount — big or small — what you should invest is up to you.

Here are three general guidelines on how to choose the right initial investment amount.

Pay off debt first

Sure, it may be tempting to start making money right away, but investing is a long-term activity. Your investments will probably begin to generate money slowly. But they will gradually earn more and more thanks to the magic of compound interest, dividends, and growth.

This means that, at least at first, a high-interest debt like credit card debt is likely to cost you more money than you’d make through investing. So, pay down any debt that has more than an 8%-10% interest rate before investing your money

Make a budget

Extra money that you put into your superannuation account — which you usually can’t withdraw before retirement — doesn’t do you any good if you can’t make your rent.

To set aside money for investing, write out a monthly budget that includes your mandatory expenses (like utilities, mortgage payments, and groceries) and discretionary spending (like entertainment and eating out). That should help you determine what you can afford to put towards an investment portfolio.

Don’t forget about emergencies

We’ve all had that unexpected expense — a car repair, medical emergency, or lay-off — that blows our budget out of the water. While putting money into super can offer tax advantages, it also makes those funds harder to access in a hurry.

Make sure you have the means to pay for an unexpected expense by setting aside money in an emergency fund savings account. The last thing you want is to have to sell your shares if you find yourself in a tight spot.

Once you’ve done those basic calculations and set some financial goals, you should be able to find an amount you can commit to investing every month. 

Yes, every month.

Investing a lump sum once and forgetting about it will still pay off in the long run. But depositing a little more every month will help you reach your financial goals sooner. 

That amount might be $2,000 each month, or maybe it’s just $10 a month. The overall amount doesn’t really matter, as long as it’s right for you. 

Do I have to pay a fee to buy shares?

As we’ve flagged earlier, investing isn’t free. Like buying any asset (a house, for example), there are fees and costs associated with investing in ASX shares. While stamp duty on shares was (thankfully) abolished decades ago in all Australian states and territories, you should still expect to pay brokerage on all share transactions you make (buy or sell). 

Brokerage is a fee you pay your broker to execute a share purchase or sale. It is normally charged on each transaction and is often scaled based on the value of the transaction (such as $10 for trades under $1,000 and $20 between $1,000 and $5,000). 

Brokerage is usually a flat rate (for example, $20 a trade) or a percentage of the trade’s value (for example, 0.2%). Many brokers charge a higher brokerage fee or a foreign currency fee (or both) to trade international shares, such as the US-listed Apple Inc (NASDAQ: AAPL). If you’re considering doing a lot of international investing, make sure you understand the fees involved.

You might have heard that US investors are not charged brokerage these days — a model famously pioneered by the US broker, Robinhood. However, this business model usually works by selling your order flow instead (that is, telling other brokers what you’re buying or selling before you do) — meaning you’re effectively taking a haircut when your order is executed anyway. Remember, there’s no free lunch here.

Brokerage is annoying, but it’s one of those things we investors just have to accept as part of the deal. However, you can typically deduct the brokerage from your capital gain to reduce your tax liability when you sell, which leads us to our next segment…

What you need to know about taxes and investing

Do you need to pay taxes on your investments? Unfortunately, yes.

As we said earlier, there is no free lunch, and this extends to taxes on investments (tax is one of the two unfortunate certainties of life, after all).

There are two types of taxes most people will have to pay in the course of investing in ASX shares: 

• income tax (taxes on your dividends)
• capital gains tax (taxes on your profits after selling).

Taxes on dividends

Usually, income tax is only directly payable on the dividends you receive from your ASX shares. These dividends are added to other income (such as salary or wages) on your tax return, and you will pay income tax on that total amount.

However, if your dividends come with franking credits, you can use them to reduce your taxable income (or receive a cash refund if you don’t pay tax). 

Franking credits are generated when a listed company pays tax on its earnings in Australia. Those earnings are distributed as dividends to investors like you. If you then had to pay tax on the dividends you received, you would effectively be taxed twice. Franking credits exist so this double taxation doesn’t occur, and it is one of the best perks you can get from investing in shares.

If a company pays no dividends, you don’t have to pay income tax. 

Taxes on profits from selling

Let’s now turn to the other tax you have to pay on ASX shares: capital gains tax (CGT). CGT is payable only if you sell your ASX shares. If you haven’t sold any shares, you won’t have a tax bill, even if the shares have gone up by 1,000%. Simple. 

However, if you decide to sell some of your shares, you will have to pay CGT on the profit you’ve made (not the whole invested amount). That amount is simply added to your taxable income at the end of the financial year. 

So, say you bought $1,000 worth of Company A shares at $10 each, and you sell them six months later for $20 (bagging a $1,000 capital gain). You would add the $1,000 gain to your taxable income on your tax return. 

But before you do that, there are a few things to know. 

Any costs incurred from investing, such as brokerage, can be deducted from your capital gain to reduce the amount of tax you have to pay. So, if you paid $20 in brokerage for both the buy and sell moves above, your ‘taxable’ capital gain would be $960, and that’s the amount you’d pay tax on.

Further, if you sell shares for a loss, you can generally roll over that capital loss and deduct it from any future capital gains in other financial years. So, if in a previous year to the trade above, you bought $1,000 worth of Company B shares at $20 a share and sold them for $10 a share, you would have incurred a capital loss of $500. You can now use that loss to offset the Company A capital gain, which will bring your taxable capital gain down to $460.

One more perk (under current tax laws) — if you own an investment for longer than 12 months before selling, you get a 50% discount on the CGT. So, if you held Company A shares for a year and a day and sold them at the $20 price, your taxable capital gain would be $480 rather than $960.

Foolish takeaway

Investing isn’t free or tax-free, for that matter. If you invest in ASX shares, you can expect to incur charges for buying and selling and a tax bill if your investment is successful. 

However, don’t let any of that put you off. Investing in anything (property, businesses, etc) usually incurs tax, and shares are no different. 

The more money you make, the more tax you’ll have to pay, but remember, you’ll still get to keep the lion’s share of your profits. So, with brokerage and taxes, always aim to keep them as low as (legally) possible, but never let them get in the way of a good investment.