How much does it take to start buying shares? £100,000? £1,000? £100? In fact, I think it is possible to get going in the stock market for even less. Here is how I would begin, with £80 a month.
Starting big versus starting small
£80 a month adds up to £960 a year. So already, that would be close to £1,000 to invest annually, thanks to the simple discipline of regular, consistent saving.
There are some disadvantages to setting out in the stock market with hundreds if not hundreds of thousands of pounds. For example, minimum commissions or fees can eat into smaller sums at a proportionately higher rate than when investing bigger amounts. That is why it can pay to take time and carefully choose what share-dealing account is best. What suits one investor may not be right for another.
But I also see advantages in starting investing on a smaller scale.
We all dream of hitting it big in the stock market, but in reality almost every investor I have known has made mistakes along the way, some of them costly. So starting on a smaller scale can make that learning experience cheaper!
Good habits from day one
The approach I would take when I start buying shares is the same one I would continue with. I would stick to areas I felt I understood when looking for companies in which to invest.
I would also pay close attention to valuation. A common beginner’s mistake is to confuse the value of a company with the value of a share in that company. Having a great business and making a great investment are not the same. Overpaying for a share can mean a brilliant business delivers a terrible return.
But one thing I might do differently when I start investing, compared to later, is be even more risk-focused. For seasoned investors, understanding risk is a critical part of investing. But in the beginning, it can be still more important as some risks might not be obvious to a novice.
Diversification on £80 a month can be more difficult than with bigger sums, but it is possible – and I would use that strategy from day one.
Finding shares to buy
One simple way to get some diversification is buying an investment trust that itself invests in dozens of different shares. As an example, City of London Investment Trust (LSE: CTY) has stakes in a range of blue-chip companies, mostly from the London market.
It has a dividend yield of 4.8%, meaning that if I invest £100 now I would hopefully earn £4.80 each year in dividends. Dividends are never guaranteed, but City of London has an impressive track record of growing its payout per share annually for 57 years.
The share price has also moved up in the past five years, although only by 5%.
The trust’s exposure to the UK means I could miss out on tech booms elsewhere and also may suffer if a weak British economy is a drag on the firm’s earnings.
Owning such a share could help me learn more about how the markets work. I see it as worth considering for investors as they start buying shares.
This post was originally published on Motley Fool
