Image source: Getty Images
Is it possible to start buying shares with a small sum of money or do I have to wait until I have a thousand pounds saved?
The answer to that question is simple. In fact, it is possible to start investing in the stock market with a limited amount.
Below I explain how a new investor, from the start, could build a stock portfolio by saving £50 a week.
The power of regular investing
Fifty pounds and here it's an arbitrary number. I could use more or less. The same principles would continue to apply. But everyone's financial circumstances are different.
In a single year, £50 a week adds up to over £1,000 to invest. From small acorns large oaks can really grow.
One step before anyone starts buying shares is to set up a shares trading account or stocks and Shares ISA.
That would allow them to start making regular contributions and be ready to invest when they found stocks to buy.
How to start investing
I say “actions”Because diversifying across different companies is a simple but powerful risk management method for investors of all levels.
As a new investor, it is helpful to familiarize yourself with key stock market concepts such as valuation and risk assessment.
Many people start with very high ambitions. I get it, but it pays to be realistic. So I think a new investor should establish a strategy for evaluating the type of stocks they plan to buy, sticking to their own circle of competence and focusing not only on the potential rewards but also how to manage risk.
Find stocks to buy
One approach would be to buy shares in investment trusts. They are pooled funds that invest in a diversified range of stocks. Examples include City of London Investment Trust and Scottish Mortgage Investment Trust.
Another approach (actually you could use both) would be to create a portfolio of individual stocks.
One mistake some people make when they start buying stocks is thinking that a great deal equals a great investment.
That may be the case, but not necessarily. A lot depends on the valuation when buying.
As an example, consider Apple (NASDAQ:AAPL). This seems like a great deal to me. It has a large target market of target customers and can exploit it thanks to competitive advantages ranging from proprietary technology to a large installed user base.
It has also been a great investment in the last five years, almost tripling in value.
But (and this is another common mistake people make when they start buying stocks) past performance shouldn't necessarily be used to set expectations about what may happen in the future.
Apple trades on a price-to-earnings ratio of 35. That seems expensive to me, especially considering the risks Apple faces, such as competition from cheaper Chinese brands.
When investing, like Warren Buffett, my goal is to buy shares of great companies at attractive prices. I think this approach may make sense for an experienced investor, but also for those who plan to start buying stocks for the first time.
