How much money does it take to start investing in the stock market? I reckon the answer is very little.
If I had never invested in the stock market before and wanted to start buying shares for just a pound a day (£7 each week) here is how I would go about it.
A regular savings habit building money to invest
Although £7 a week may not sound like a lot, it adds up. In a year, that habit would give me £365 to invest.
Once I got going, if I decided to increase my regular saving amount so I had more to invest, I could do so.
My first move would be to set up a share-dealing account or Stocks and Shares ISA in which to put my regular savings, ready to invest. There are lots of options available, so I would take some time to choose one that best suited my own financial circumstances and objectives.
Learning about the stock market
Even as the money started to pile up, I would do some research before investing it.
For example, I would want to learn more about how the stock market works in practice. Investing is not as simple as finding a great company then buying shares in it expecting them to go up in value. Even if the company is great, if the shares are overvalued, then they may go down not up.
So learning about key stock market concepts matters when it comes to building wealth. Next, I would make a list of shares I would like to start investing by buying – and do just that!
How to find shares to buy
When it comes to buying shares, I would keep things simple. I would begin by sticking to shares in businesses I understood, that had a proven business model and were of a certain size.
They do not need to be massive companies, but I would initially avoid small companies partly because they can sometimes be very volatile and lack the level of institutional investment that, in theory at least, helps act as a constraint on the boards of large firms.
As an example of the sort of share I would look for, consider one from my portfolio, Legal & General (LSE: LGEN).
It benefits from a large market of potential customers. I think that strong demand for retirement-linked financial services is likely to endure for decades.
Asking the right questions as an investor
Other firms also compete – so what helps set Legal & General apart? (That is always an important question to ask as an investor, as it helps identify whether a company has pricing power that can help fuel profits).
In my mind, the strong, long-established umbrella logo and brand help. So too does the company’s established customer base and deep expertise.
It is important to start investing as you mean to go on – by looking honestly at the risks of a given share, not just the reasons to be excited about it.
For example, although Legal & General has a 9.5% dividend yield now (meaning each £100 invested today will hopefully earn £9.50 in dividends annually, if the dividend is maintained) it did cut its payout during the financial crisis. If markets tumble and policyholders withdraw funds, it could do the same again.
This post was originally published on Motley Fool
