As I improve this blog, I will answer some of the most fundamental questions that I asked myself when I was starting out. Hopefully, shedding a light to investing where most people don’t have the convenience of knowing. I will start by asking you: “Will you be value investing or day trading?”
Let’s start off our discussion by imagining that you will be trading the stock market. First, you’ll need a trading system. Once you have your handy dandy trading system, you will need to know how much return on investment that trading system would give you. If say for example, you have done your research and you realized that the trading system will bring you 10% return every month. You will need to answer the 2nd question: how much money do you need for living expenses?
If you have those numbers as well, you only need to do some simple math. Assuming I need P20,000 as living expenses…
Living expenses = P20,000
Trading system return per month = 10%
Doing the math:
P20,000 / 0.10 = P200,000
So you’ll need 200,000 to get started, if you’ll be depending on your trading to live. Which means you’re going to be full time trading the stock market. Of course, if you’re not going to be going full time, you can just deposit the minimum amount to open an account which is P25,000 for most brokers. And you can go from there.
For investing, its a little bit tricky. Most full time investors do not derive a monthly income from investing. They usually go on without an income for years, aside from dividends and would only have a payday from when an idea played out as expected. Which means, most full time investors have enough cash in the bank, to not have to depend on investing money to live off of. They can go on for years just waiting for an investment to go up in value.
So which means for you, you will have to first save up for an emergency fund of 6 months to 1 year living expenses and some money to start your investing fund. The exact amount of that investing fund is entirely up to you. The bigger the better. And it takes a lot of discipline to make it a big enough fund to make a difference.
Say for example, if you were to derive income from investing, most of the income will not be coming from the buying and selling of stocks. It would be coming from the dividends. So you may need a lot of money to be in the same situation as the trader. Let’s say for example you also need P20,000 living expenses. For a stock that pays a 3% dividend yield, you will need P8,000,000 worth of stocks to have a P20,000 income from the dividends.
Here’s a breakdown of the amount of money you need to have the same P20,000 income in dividends:
- 3% – P8,000,000
- 4% – P6,000,000
- 5% – P4,800,000
- 6% – P4,000,000
The math is:
Income for 1 year / Dividend Yield = Amount You Need
Example 20,000 per month is 240,000 per year. Using a 3% dividend yield.
240,000 / 0.03 = 8,000,000
Of course, you could also compute the income the same way as the trader. If you have an investing strategy, you will need to know how much the strategy would return to you and do the math.
The advantage of the dividend approach is that, once you have the necessary amount, you don’t have to work anymore. That dividends will come and you don’t have to do anything. Unlike the trader where he have to work for the money because he has smaller start up capital. The only drawback to the dividend approach is that, you really need to save up the money.
There’s a lot of variations on this. Because the investor may not focus on income altogether and doesn’t mind having no income at all. They just depend on their strategy to provide the income.
After all that explanation, all I can say to you is this, just start investing and keep on adding to that fund. I believe P25,000 is a good enough place to start. As most brokers will allow you to open an account with that small amount of money. If you don’t have that kind of money, you should start saving now. You can’t enter a party without having to pay the entrance fee. 🙂 You’ll be happy that you did.