Does it take a lot of money to start investing?
In a nutshell, the answer is no. In fact, I see some advantages to beginning in the stock market on a small scale. It can avoid the long delay possibly caused by waiting to save up far bigger sums. It can also mean that beginners’ mistakes are less costly than if one began investing with much larger amounts.
If I had a spare £850 and wanted to start buying shares for the first time in the next few weeks, here is how I would go about it.
The basic approach
My first move would be to set up a share-dealing account or Stocks and Shares ISA then put the money into it.
With £850, I could comfortably diversify across several shares. That is exactly what I would do, as putting all my eggs in one basket is an unnecessary concentration of risk.
Would I hope to get rich shortly after I start investing? No, for two reasons.
First, I need to be realistic about expectations: turning £850 into £1,000 or even £2,000 or £3,000 over time might be possible. But £850 is unlikely to give me a portfolio worth tens of thousands of pounds in the next few years if I stick to well proven, blue-chip companies. Such a short-term return is possible, but unlikely.
Second, although it may sound odd, my initial focus would not be on making money but on trying to avoid losing it.
As many people discover when they actually start investing, putting real money into the stock market is not necessarily the same as imagining putting money in. I would likely learn some hard lessons, as many investors do. So I would focus first on understanding and managing risks, rather than potentially unrealistic hopes of enormous short-term returns.
Finding shares to buy
Of course, my point in investing would be to try and increase the value of my portfolio. Hopefully I could achieve that, although I would take a long-term approach to it.
So, what would I look for?
A company like Reckitt (LSE: RKT) illustrates the point. Its share price has taken a tumble recently due to adverse court findings in the infant nutrition industry that threaten high costs for it and potentially for competitors too. That could eat into profits for years.
But the underlying market for the sorts of products Reckitt produces, such as cleaning products, is vast and likely to remain that way. Thanks to its stable of well-known brands and proprietary technologies, it is able to charge a pricing premium. That has been a recipe for profits proven over decades and, while there will likely be ups and downs along the way depending on how wealthy or otherwise households are, I expect that to remain the case.
Simply finding a good business is not enough to succeed in the stock market, though: valuation also matters. That is where Reckitt’s problems present what I see as an opportunity as I think the share price does not reflect the potential long-term value of the business. If I had spare money to invest today and had no stock market experience, Reckitt would be on my shopping list as I started to invest.
This post was originally published on Motley Fool
