Investing on a small budget: Yes, it’s possible!

These days, thanks to technology, lacking a big source of ready cash to buy enough shares to create a swanky portfolio is no longer a serious barrier to getting into the investment game. It’s all a matter of knowing the best ways to get started with a small amount of money.

CFDs are the way to go

How can you get into the stock market with limited capital? You have to use derivatives. In other words, using the leverage of contracts for difference (CFDs) is your way in. In any case, it is wise to learn all about CFDs because being able to wield them is a good skill to have in your trading armor.

Because you are speculating on the market using leverage, you can operate in the market with far less capital than you actually possess. You are not buying the underlying asset – the shares, in this case – and that is what sets this approach apart.

However, operating with more capital than you possess naturally comes with big risk. CFDs are not for beginners or the faint-hearted. Although you can win big, you can also lose big. Make sure you have tried CFDs on a demo basis before you trade. Alternatively, opt for smaller deals you are very certain of before going in for the more exciting deals.

You are speculating on the price of stocks moving a certain way in a leverage deal. Should you be correct, you could make a profit that is many times the value of your deposit. However, the same is also true if you lose as you could lose more than the value of all the capital you have.

Should you try share dividends?

CFD trading advice sometimes skips over the fact that your CFD can lead to you attaining share dividends. Some traders aren’t getting shares for the sake of selling them to get a profit; instead, they want to acquire dividend payments should the company declare a dividend. There is nothing stopping you from getting dividends even if these come from derivatives such as CFDs. Your derivative position could be agglomerated, and you could then buy shares relative to this. Once you have shares this way, you will be part of every dividend payout.

How to start and how much you’ll need

Look for a reputable CFD broker, taking into account expert reviews, your needs, the fee or commission structure, and the platform. A good CFD broker will have CFDs on shares, indices, commodities and ETFs. You should be able to start with a minimum of somewhere between $200 and $300.

The best approach

Most seasoned traders believe that the best way to start with limited capital is via social trading, specifically copy trading.

In social trading, the relevant broker allows you to copy the actions of another successful trader, proportionate to the capital you have available. The platform will allow you to interact with other traders as you would on a social trading network. A good social trading network will allow you to:

  • Access the profiles, statistics and past performance of other investors so you can identify who you’d like to mimic based on who you think has the best chance of success
  • Read the opinions and insights of these other traders so you can learn from their strategies
  • Follow them just as you would follow someone on Facebook or Twitter so you know what they are sharing, thinking and trading
  • Interact with them so you can exchange ideas, pick their brains or get clarity on specific points
  • Automatically copy their new trading moves through automated software

Starting like this allows you to minimize risk because you can study your subject – the trader ­– and assess whether their trades are successful. Even with the best traders, not every deal will be a success. However, historical performance can give you a good idea of what you might expect in the future. Best of all, when you are capitalizing on CFDs, you will be able to put down a small amount of money for a potentially big profit.