There are lots of reasons some people who want to get into the stock market never actually start buying shares.
One is a lack of funds. But in reality it is possible to invest with just a few hundred pounds (or even less).
Another is a lack of knowledge. But, although experience can help, the way I am buying shares now is the same way I would if I had my first stock market moment all over again.
How I invest £500
When I have £500 to invest, what I do with it depends on how much else I may already have invested. That is because an important risk management principle is diversifying across different shares in case one (or more!) is disappointing.
So, as I already have a portfolio of different shares, I am happy to put £500 into a single share. But I do not – ever – put all of my money into one company. If £500 was all I had, therefore, I would spread it over different shares.
I want to invest efficiently, so I use a Stocks and Shares ISA. In some situations, I use a SIPP or may consider using a share-dealing account.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
What I am looking for
Before I start buying shares, I want to make sure I know as well as I can what I am getting into.
So I stick to areas I think I understand, meaning I am better able to assess a company’s position and prospects. If I do not understand an area, I can always take time to do some research and improve my knowledge of it before investing.
Next, I look for companies I think have a competitive advantage and a target market I expect to remain sizeable over time.
One mistake new and experienced investors alike can make is not paying enough attention to a company’s accounts. If it has lots of debt on the balance sheet, that can make it unattractive. Profitable companies have gone bankrupt before now simply because they cannot repay their debt.
I also look at valuation. A good business can make for a poor investment if I overpay for its shares.
Putting my money where my mouth is
One share I think exemplifies my approach is my holding in FTSE 100 asset manager M&G (LSE: MNG).
The market for asset management is large and I expect that it will remain that way for the long term (which is my investment timeframe, by the way).
With a strong brand, long asset management experience, and millions of customers in multiple markets, I see M&G as having competitive advantages.
It aims to maintain or raise its dividend per share each year (although in practice that is never a sure thing). With a 10% dividend yield, the share is a lucrative source of passive income streams for me.
Will that last? One risk I see is that customers pulling more funds out than they put in could hurt profits. In M&G’s non-Heritage business, that happened in the first half of the year.
I will be keeping an eye on that risk, as I do like the 10% yield!
This post was originally published on Motley Fool
