Image source: Getty Images
Is it possible to start buying shares with a small sum of money, or is it necessary to wait until a thousand pounds I’d saved up?
The answer to that question is simple. It is, indeed, possible to start investing in the stock market with a limited amount.
Below, I explain how a new investor, from a standing start, could build a share portfolio by putting aside £50 per week.
The power of regular investing
Fifty pounds and is an arbitrary number here. I could use more, or less. The same principles would still apply. But everyone’s financial circumstances are different.
Over a single year, £50 a week adds up to more than £1,000 to invest. From little acorns great oaks really can grow.
One move before someone starts buying shares it to set up a share-dealing account or Stocks and Shares ISA.
That would let them start making regular contributions and be ready to invest when they found shares to buy.
How to start investing
I say “shares” because diversifying across different companies is a simple but powerful risk management method for investors on all levels.
As a new investor, it helps to get to grips with key stock market concepts like valuation and risk assessment.
A lot of people start with sky-high ambitions. I understand that but it pays to be realistic. So I think a new investor should set a strategy for assessing the sort of shares they plan to buy, sticking to their own circle of competence and focusing not just on possible rewards but also on how to manage risk.
Finding shares to buy
One approach would be to buy shares in investment trusts. They are pooled funds that invest in a diversified range of shares. Examples include City of London Investment Trust and Scottish Mortgage Investment Trust.
Another approach (both could actually be used) would be to put together a portfolio of individual shares.
One mistake some people make when they start buying shares is thinking that a great business equals a great investment.
That can be the case but not necessarily. A lot depends on valuation when purchasing.
As an example, consider Apple (NASDAQ: AAPL). This looks like a great business to me. It has a large addressable market of target customers and can exploit that thanks to competitive advantages ranging from proprietary technology to a large installed user base.
It has also been a great investment in the past five years, almost tripling in value.
But (and this is another common mistake people make when they start buying shares) past performance should not necessarily be used to set expectations for what may happen in future.
Apple trades on a price-to-earnings ratio of 35. That looks expensive to me, especially considering risks Apple faces such as competition from cheaper Chinese brands.
When investing, like Warren Buffett, I aim to buy shares in great companies at attractive prices. I think that approach can makes sense for an experienced investor, but also for those who plan to start buying shares for the first time.
