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You don't need tens of thousands or even thousands of pounds to start buying shares. In fact, I see some advantages in starting an investment activity earlier on a more modest basis, without waiting years or decades to save funds.
It would give me a longer timeframe to reap potential investment benefits, for example. Hopefully, it could also mean that any rookie mistakes you made would be less costly.
If you had never invested in the stock market before and wanted to use your spare £400 to start buying shares this week, this is how you would do it.
Start small and aim for growth
With £400, it might seem tempting to go for some small businesses which, if things go well, could become stratospheric.
I would take a different approach, for several reasons. I am an investor, not a speculator and with only £400 to invest I would certainly want to avoid unnecessary risks. Instead of investing in companies that could become massive, I would prefer to invest in those that are already massive and with proven business models.
In doing so, I would focus on targeting companies that I thought had good long-term prospects and an attractive price, as well as a proven business model. However, the future is unpredictable, so I would try to reduce my risk by spreading the £400 across a number of different stocks.
Finding stocks to Buy for the First Time
With thousands of stocks available to buy, where would you start as a beginner? As billionaire investor Warren Buffett emphasizes, I would stick to my circle of competence and choose businesses that I felt I understood and could therefore analyze.
I would look for a company that I expected to perform well in the future and have a decent balance sheet. Too much debt can destroy even a solid company.
As an example, a stock that I think investors might consider buying is Dunelmo (LSE: DNLM). The company operates in an area that is likely to see strong long-term demand as people continue to want to decorate or redecorate their living space.
Thanks to unique product lines and a large customer base, Dunelm has what I consider a strong competitive advantage. It has been consistently profitable and I also like the dividend record. It often pays special dividends when it has extra cash, although any company's dividends are never guaranteed to last.
In the last five years, Dunelm's share price has risen 47%. That means its price-to-earnings ratio (a common valuation metric) is 16, which I don't see as a bargain but I think is fair for a business of Dunelm's quality.
Starting the journey of generating wealth
Like any stock, Dunelm has risks. A weak housing market could hurt sales and income, for example. Managing risks, both obvious and invisible, is a key skill for any investor and one that I would start honing from day one.
I would start buying shares by creating a shares trading account or stocks and Shares ISA today, and then research which businesses appealed to me as investments at their current price.
