The idea of getting into the stock market dangles the appeal of potentially building wealth. But it could be a costly exercise too – and it can be confusing knowing where to start.
Perhaps that explains why many people who could potentially be very successful stock market investors miss out, as they never actually start buying shares.
If I had not invested before and wanted to start investing without waiting until I had saved up thousands of pounds to do so, here is the plan I would implement.
Setting up a dealing account
My first move would be to set up an account that let me buy shares and put the money I wanted to invest into it.
This could be a share-dealing account or Stocks and Shares ISA. If I was investing £830, high dealing commissions and fees (or account management fees) could eat into my capital quite quickly once I started buying shares. So I would compare the options carefully to find one that seemed well-suited to my own financial situation.
Understanding basic investing principles
I would want to understand more about how the stock market works before putting my money into it. My first move though, would be getting to grips with basic but important investing principles such as how to reduce my risk by diversifying my holdings and how I ought to go about constructing a portfolio.
Even a modest sum of money can form the basis of a fortune, if it is invested in the right way over the long term. So I would not plunge blindly into the stock market. Instead I would learn, decide what I aimed to do – then consider how.
Finding shares to buy
Once I felt ready, I would start looking for shares to buy.
There are three key elements to this, in my view. One is whether a business has strong enough potential. The second is whether the valuation gives me enough potential to make money from that potential. Even a great company can make for a bad investment if I overpay, after all.
The third consideration would be how a share fits into my overall portfolio. For example, if all I own is banking shares then buying another bank share could concentrate my risk further.
One share I’d happily own
I would start buying shares by investing in a company like Reckitt (LSE: RKT). The consumer goods company has had a run of bad luck recently, with legal woes from a disastrous infant formula acquisition creating a risk of lower profits into the future.
But there is still a lot to like here and I think the battered price (down by a quarter in the past year) makes the shares look attractively priced to me. Indeed, if I had spare cash to invest, I would happily start buying Reckitt shares for my portfolio.
Demand in its markets is resilient, it has plenty of strong brands that give it pricing power and it generates significant cash. The blue-chip FTSE 100 share also offers a 4.5% dividend yield.
This post was originally published on Motley Fool
