There are different reasons why some people dream of making money in the stock market yet let years pass without making a move. One common reason I think some people do not start buying shares earlier is a lack of cash.
That is understandable – or is it?
After all, it is possible to start buying shares with a relatively small amount of money. In fact, in some ways I think that makes better sense than spending years saving up a large sum of money to begin investing. For example, it means that beginners’ mistakes will hopefully be less financially painful than if investing a much larger sum.
If I had never invested before and had a spare £380, here are three steps I would take to start buying shares now.
Step one: setting up an account for stock market dealing
My first move would be to set up an account that let me buy shares and put the £380 into it, ready to invest.
For example, that might be a share-dealing account or Stocks and Shares ISA.
There are lots of options available, so I would take time to find what suited me best. With a relatively small sum at hand, one of my considerations would be the commission or fees I needed to pay to buy or sell shares.
Step two: learning about the stock market
My next move would be to get a good understanding of how the stock market works.
From the outside this can seem simple. But when one is actually investing rather than merely observing, some things can be more complicated than they first appear. For example, a brilliant business with a high share price can end up making for a poor investment.
So I would try to learn how different people value shares and why.
My goal would be to equip myself to spot shares in great companies that I felt could potentially help me grow my investment value over time, because of a gap in the current company valuation compared to what I think it is worth.
Step three: building a portfolio
Now I would be ready to start buying shares!
Diversification is an important risk management strategy and, even with £380, I would already begin by spreading my money over more than one share.
The sort of share I would be looking for can be illustrated by one I recently bought, Diageo (LSE: DGE). The brewer and distiller has a wide range of premium brands in its portfolio that it markets worldwide. That gives it pricing power that helped it earn £3.7bn in profits after tax last year.
Those profits help support a dividend that has increased annually for over three decades.
Currently the yield is 3.1%, so hopefully such a share can earn me passive income in the form of dividends. The bigger appeal for me, though, is the potential I see for share price growth.
The shares have fallen 22% in the past five years. I think that reflects some real risks. Luxury spending is falling in many markets. Diageo’s pricy tipples have seen weaker demand in Latin America and that could spread elsewhere, hurting profits.
But as a long-term investor, this is the sort of share I would happily tuck away for years.
This post was originally published on Motley Fool
