If I had never invested in the stock market before and had £3,000 to spare, here is how I would start buying shares now.
Why I’d invest
Before explaining how I would start investing, let me explain why.
Buying shares, even on a relatively modest scale, could hopefully help me benefit financially from the performance of businesses in which I invested. The longer I wait to do that, the more opportunities I might miss along the way – if I ever start at all.
Getting ready
My first move would be to put the £3,000 into a share-dealing account or Stocks and Shares ISA.
There are lots of options, so I would take time and do some research to help me decide what option suited my own circumstances best.
Next I would learn about important stock market concepts. For example, a good company might not make for a good investment: valuation matters.
Building a portfolio
Another important concept is risk management. Even with £3,000 I could comfortably diversify my holdings across a range of businesses. That would reduce the impact on my overall performance of one share faring poorly.
I would stick to companies in areas I understood. After all, I want to be an investor not a speculator.
In terms of timescale, I would aim to start buying shares now I could envisage holding for the long term. My aim would be on businesses with a competitive advantage in an area I expect to benefit from sustained customer demand on a large scale.
An example in practice
The sort of share I mean can be illustrated by one I already own: M&G (LSE: MNG).
The FTSE 100 asset manager operates in a market that involves large sums of money, so even relatively small commissions and fees can soon add up. Such a potentially lucrative line of business naturally attracts a lot of competitors. M&G enjoys advantages including a strong brand, a client base stretching to millions spread over more than two dozen markets, and deep asset management expertise.
Despite that, the firm with its 9.6% dividend yield has a market capitalisation of under £5bn.
Maybe part of the reason for that valuation is the risk some investors see that long-term demand for active asset management could fall as many investors now use passive tracker funds. Still, I think the combination of potential reward and risk at M&G is an attractive one, which is why I own the share.
Setting realistic expectations
One mistake people sometimes make when they start buying shares is dreaming of huge rewards and not paying enough attention to possible risks.
That is understandable, but risks are real – and matter a lot. So if I was to start investing from scratch, I would begin with a conservative set of expectations and think about possible risks at least as much as potential rewards.
With the right mindset, careful selection of shares, and some research, hopefully I could use my initial foray into the stock market to my profit!
This post was originally published on Motley Fool
