How to start trading with a tenner
Trading was once considered an action that only the wealthy could take part in. But thanks to the rise of accessible and affordable trading apps and the vast information and educational resources available online, anybody can give trading a go, provided they put the time and effort into learning the ropes.
While prospective traders don’t need to be super-rich to trade the markets, they obviously need to be willing to spend some money. And for those just getting started and cautious about investing huge sums so soon can actually dip their toes into the world of trading with as little as a tenner. Bear in mind that being this frugal will place huge limits on the stocks and markets available and will probably mean not seeing any returns worth shouting about. Nevertheless, for those wanting to give trading a go on the cheap, there are a couple of routes to follow.
Try spread trading
Most people assume trading involves buying individual stocks and shares, however, there is a more cost-effective alternative: spread trading. Rather than investing in individual stocks, this method involves speculating on the price movements of entire markets. For example, trade a stock index like the S&P 500 or FTSE 100, commodities like gold and crude oil or currency pairs (forex trading) like GBP/USD or EUR/USD. To put it simply, those who correctly speculate on the market’s price movements make a profit. Get it wrong, experience losses instead.
It’s important to note that those who only want to trade £10 at this stage will need to find a broker that will this. Many require a deposit aof certain amount of money in an account, which often exceeds this figure and they will also set a minimum stake – the amount to trade for each point movement in a chosen market. This means if a stake was 50p and it was correctly speculated that the value of the market will increase, the profit will be £5 if it moves 10 points in the chosen direction.
The other thing to bear in mind is that spread trading is a leveraged product. Users effectively pay a deposit (called the margin) which allows them to put down a small amount of the trade’s total value rather than covering the full cost, making it cheaper to trade. That said, never forget that profits and losses will be magnified in line with the true value, so it’s incredibly important to consider the risks and never trade money that can’t afford to be lost. Basically, to spread trade with a tenner, find a broker offering a market where the leverage deposit requirement is just £10. This is by no means commonplace, but there are providers out there that allow this, so cast the net wide when looking for someone to trade with. It’s also recommended to choose a provider willing to actively help educate along a trading journey.
Pick cheap stocks
Trading stocks from big-name companies may not be an option for those only willing to pay a tenner. For example, at the time of writing, a share in Apple costs $134.76 and one in Facebook costs $303.59. However, those who would rather trade specific companies rather than broader markets, the best thing to do is look out for cheap stocks that may eventually grow in value, resulting in profits.
Given the budget restrictions, this means trading penny stocks – shares that cost less than $5. This may be the case for large corporations. For example, The Motley Fool writer Christopher Ruane recently drew attention to Cineworld and Lloyds, which at that point only cost 96p and 42p respectively. While companies that are still in their relative infancy may be cheap now but become much more valuable in the future – Amazon, Apple and Ford all started as penny stocks.
Again, it’s crucial to be aware of the risks of this approach as losses will occur when share prices fall. What’s more, penny stocks can be especially risky. As Investopedia points out, it can be difficult to find information on such companies, there’s usually a lack of historical data and liquidity and these stocks may not always fulfil minimum standards requirements to remain on the exchange. Therefore, simply buying stocks because they’re cheap could prove to be very costly. Conduct thorough research before going down this avenue.
Invest instead of trade
Rather than engaging in short-term trades, consider growing the £10 in the long term by putting it in a stocks and shares ISA. Putting in a tenner every week or month will add up quickly and this will likely see much greater growth compared with cash ISAs and savings accounts with low interest rates. According to Moneyfacts.co.uk the average stocks and shares ISA returned 4.80% in the 2017-18 tax year, and 4.04% for 2018-19. The average cash ISA stuck at 1.01%.
That isn’t to say that this is risk free. Money is still being put into the stock market so the value of a fund could fall just as quickly as it could rise. But those who like the idea of investing bit by bit, are happy to leave an ISA untouched for years (even during periods of market volatility) and want a hands-off approach to savings, this is certainly worth exploring.
The editorial unit
The material contained in this article is of the nature of general comment only. The financial information is not advice and should not be treated as such.