You may think you need a large amount of money to invest in stocks, but that's a myth — and here's why.
"You can begin with as little as $500 to $1,000 and add to it as you earn and save more money," IBD founder William O'Neil wrote in his book "How to Make Money in Stocks."
O'Neil should know. He started his hugely successful career investing in stocks by buying five shares of Procter & Gamble when he was only 21 years old.
With small initial success, you can build up a portfolio quickly. It's best to start with what you have and let gains grow, letting time and the power of compounding work for you.
With many brokers offering no-commission trades and well-equipped trading apps, investing in stocks is easier and cheaper than ever.
Initial Steps To Investing In Stocks
First, identify the overall market direction. You want to start investing when the market is in a confirmed uptrend. Visit the Investors.com homepage or the Big Picture column to get the latest outlook.
Start with a few well-researched growth companies that you have conviction in. That's better than spreading your capital into many stocks, especially if you have a small amount to start with, such as $1,000.
You have to ask yourself: How much of my portfolio am I willing to put into one stock? 5%, 10%, 20%?
To give you an idea, the IBD Leaderboard model portfolio considers 10% of its whole portfolio as a full position, with 5% as a half and 2.5% a quarter position.
Investing In Stocks
You can scan through the IBD 50 Index or the MarketSmith Growth 250 in MarketSmith to find quality growth stocks. Sort by IBD Composite, EPS and RS Ratings to get a good look at each stock.
We are seeking the leading one or two stocks within the top 40 industry groups in IBD's rankings. MarketSmith and the IBD Stock Checkup will show the industry's ranking and the stock's ranking within the group.
To choose the ones to buy, look for charts setting up in bases and hitting buy points in heavy volume.
And always remember to follow proper risk management by cutting losses at the 7% level.
How A $10,000 Investment Gained 20%
Let's say you had $10,000 to invest in stocks and split it into one $5,000 position and two $2,500 positions.
If you invested $5,000 in PulteGroup at the proper 60.89 buy point of a cup base on April 18, you would be sitting in the 20% profit zone with over $1,000 profit in about two months.
Suppose your second purchase was $2,500 of Royal Caribbean Group at the 76.30 ideal entry on May 8. You'd be up over 25% by now.
If your last $2,500 went to Axcelis Technologies when it broke out of a base hitting the 136.38 entry on May 17, you would have racked up another 20% gain in little more than a week.
Therefore, if you sold each in the 20% profit zone you'd have a $2,000 profit in a short period of time. Congratulations!
Notice that the stock market was in a confirmed uptrend when these three stocks rallied, which underscores the importance of trading with the market's flow.
Of course, chances are at least one of your first three trades will go against you. That's why it's crucial to cut losses short and preserve capital.
If you have a larger portfolio, say $500,000 or $1,000,000, the concept is the same. Larger capital doesn't necessarily mean buy more stocks. O'Neil said, "Even investors with portfolios of more than a million dollars need not own more than six or seven well-selected securities."
If you had $1,000,000 to invest into 7 stocks, a full position would be $142,857.
Follow Kimberley Koenig for more stock market news on Twitter @IBD_KKoenig.
