Image source: Getty Images
Year after year, some people plan to start buying shares – but never actually do so.
Maybe they feel they do not know enough, or do not have enough spare money to invest. Meanwhile, potentially lucrative opportunities simply pass them by.
In reality, it does not take a lot of money to start investing.
In fact, I think beginning on a relatively small scale can offer some benefits: it may allow a quicker start that saving up large amounts first and any beginners’ mistakes will hopefully prove less costly.
If someone had a spare £250 and wanted to start buying shares, here are three steps that would put them on their way.
Step 1: setting up an ISA or share-dealing account
When the time comes to invest that £250 there needs to be a way to do it. Setting up a share-dealing account or Stocks and Shares ISA could be left until someone finds specific shares to buy.
But I think setting it up in advance means that any delay between starting to open it and being able to use it does not necessarily mean lost time in the markets.
There are lots of options available.
On any budget, but especially a small one, I pay close attention to things like dealing costs and commissions that could eat into my money. Indeed, one reason I chose a specific ISA for myself from the many available options was its competitive cost basis.
Step two: getting to grips with how to invest and what to invest in
Like many things in life, investing can seem easier before you actually start doing it.
So it is simply good sense to learn how the stock market works before getting actively involved in it.
For example, one common mistake people make when they start buying shares is ignoring the valuation for a company implied by its share price.
Let’s use Apple (NASDAQ: AAPL) as an example.
At the right price, I think Apple would be a share investors should consider. Indeed, I have owned it myself in the past and a lot of the reasons why still apply.
Its market is huge and likely to stay that way or even grow. Apple has competitive advantages such as a strong brand, proprietary operating system and technology, large customer base and service ecosystem.
But what about its valuation?
One common valuation metric is a price-to-earnings (P/E) ratio. It is not perfect: a company may have a cheap-looking P/E ratio but a lot of debt on its balance sheet, for example. But while Apple’s balance sheet does not bother me as an investor, its P/E ratio does.
At 42, it is higher than I like. After all, risks such as growing low-cost phone competition could eat into future earnings.
A high P/E ratio can mean overpaying even for a good business. A very profitable business does not necessarily equate to a profitable investment.
Step three: making a move
Having found shares to invest in that seem to offer an attractive price for a good business, what next?
In my case, if I had spare funds, I would start buying those shares.
Whether investing £250 or a larger amount, I always spread my portfolio across at least a few different shares to help reduce my risk if one disappoints me.
