Getting into the stock market does not need to involve large sums of money.
Here is how someone who has not invested before could start buying shares this year, with just £300.
Starting big and small can be costly in different ways
One advantage of beginning on a fairly modest scale is that any beginner’s mistakes will hopefully be less expensive than if one was investing thousands of pounds!
But there are potential disadvantages too. For example, some stockbrokers charge minimum commissions or fees, that could quickly eat into £300.
So I think it makes sense to do some research and compare different options when selecting a share-dealing account or Stocks and Shares ISA.
Learning how to invest
Before getting into the stock market, it is important to understand how it works.
For example, over the past five years, chipmaker Nvidia has seen its share price soar by 2,264%. That is exceptional performance. Can it last?
Past performance is not necessarily a guide to what may happen in future.
Just because a share has done well does not mean it will keep doing so. But the converse is also true: just because a share has done well does not necessarily mean that it will perform weakly in coming years. Rolls-Royce shares did brilliantly in 2023. They did brilliantly again last year.
So, even novice investors need to get to grips with concepts like valuation.
Nvidia makes huge profits, but its share price is equivalent to 57 years’ worth of last year’s earnings per share (this is what is known as a price-to-earnings ratio).
To me that looks like an expensive valuation. After all, AI spending could fall and Nvidia’s competitive advantage may be eroded by increased competition in the field.
Clearly, though, not all investors see things that way, which helps explain the current valuation. Chips are a large market and the market size is set to grow over the long term. Nvidia has proprietary technology and a large existing customer base of top-flight clients. That could help it push up earnings in coming years.
As with almost any investment case, there are two sides to Nvidia at its current share price.
Personally I like the business but not the valuation, so I have no plans to invest.
Each stock market investor needs to make their own choices. But I think doing that well involves understanding how the stock market works and aiming to be a good investor from day one!
Finding shares to buy
An important principle is diversification and even with £300 it is possible for a new investor to spread risks.
For example, that could involve buying several shares or buying into an investment trust that itself has a diversified portfolio.
I think it is important too to set realistic expectations. The stock market can be rewarding – but it also involves managing risks.
Going in with a realistic approach matched to one’s budget and capabilities is important if one is serious about trying to build wealth over the long term.
This post was originally published on Motley Fool
