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The idea of entering the stock market can be exciting but daunting. For example, a concern that some people have is that it is not possible to start investing without a large sum of money.
In fact, that is not the case. Personally, I see some advantages in starting on a smaller scale and trying to keep the cost of beginner mistakes as small as possible.
If I had an extra £300 and had never invested before, this is the approach I would take to start this month.
Learn, learn, learn
First, I would try to better understand how the stock market really works. It's simply not true that investing in a successful company automatically helps me make money.
I need to understand the future prospects of a company and also to what extent its current valuation reflects (or does not) those prospects.
Getting ready to invest
Even with £300, I'd like to manage my risk by spreading my options across more than one stock.
But before I could spend a single penny on the stock market, I would need to have a way to use my £300 to buy shares.
You would then set up a shares trading account or stocks and Shares ISA. There are lots available and perhaps in the future I would like to have one that I can fill with cash, but at first I would consider my initial planned budget of £300. I would pay attention to things like minimum fees and commissions when looking for an account that best suits my financial circumstances.
Great habits from day one.
I wouldn't start investing with the dream of turning my £300 into a million pounds. I wouldn't even expect to turn it into £1,000, as nice as that is (and, in practice, it could happen).
Instead, I would start by following billionaire investor Warren Buffett, who says the first rule of investing is not to lose money and the second rule is to never forget the first!
In other words, my focus would not be on trying to make as much money as possible at the beginning, but rather on managing my risks closely while learning. In fact, I wouldn't use that risk minimization approach just when starting to invest; like Buffett, I would apply it for the rest of my investing decades.
Starting simple
An example of the type of stock I think new investors should consider buying is City of London Investment Trust (LSE: CTY).
As an investment trust, it invests in dozens of different companies, which helps my diversification. These are mostly British companies, meaning the City of London faces risks if the UK economy performs weakly.
In the last five years, participation has increased only 5%, not what most people dream of when they start investing.
Still, as a risk-averse beginner, I like their conservative portfolio management approach. It also doesn't hurt that the trust has increased its dividend per share annually since the 1960s.
Its current dividend yield of 4.8% is well above the FTSE 100 average, helping to offset the modest share price performance in recent years.
