Image source: Getty Images
Is the beginning of a new year a good time to start buying stocks?
Many people pay attention to the idea of starting investing when a new year begins. But sometimes they fail to turn their idea into action.
They may be worried that it's not the right time or that investing will require a lot of money.
If you had an extra £800 and wanted to start buying shares for the first time, this is how you would do it.
1. Set up a stock trading account
I would need some way to start buying stocks in practice.
You would then set up a shares trading account or stocks and Shares ISA. That way, when you were ready to invest, you could do so right away.
2. Learn about the stock market
Apple sells many millions of expensive phones every year. Does that make it a good business or a good investment?
A common mistake people make when they start buying stocks is thinking that a good deal equals a good investment.
In reality, other factors may matter.
For example, what about valuation and balance sheet?
Learning how the stock market works, including what types of factors to consider when weighing a potential investment, is an important step even when you start investing in stocks on a modest scale.
An alternative to purchasing individual stocks could be to simply invest in a mutual fund. For example, a typical investment trust owns a variety of different stocks. Simply buying it would give me indirect exposure to those stocks.
3.Make a wish list
My next step would be to compile a list of actions to take.
To do this, I would limit myself to companies that I felt I understood and weighed their long-term prospects.
Basically, I would be looking for a company that I believe has a sustainable competitive advantage in a market where I expect to see continued customer demand.
Think of a business like Unilever. It has unique brands such as Flowerpotmy. This helps you generate profits as customers are willing to pay a premium price for the product as there is no direct alternative.
4. Move to buy
But why do I make a wish list instead of just making a shopping list?
The answer, again, is valuation.
Even a great company can make a terrible investment if I overpay for its stock. For example, I would happily own Scientific Judges shares, but I have no intention of paying the current share price.
So I would weigh up the stocks on my watchlist and keep an eye on the market to see if they were available at what I thought was a good price (some trading platforms allow users to set an automatic alert to do this).
5. Buy and hold
My fifth and final step would be to start buying stocks.
I am an investor, not a trader. I view stocks as shares in a business, not just pieces of paper. If I want to invest in a business, I do so with the intention of holding the stock for the long term.
Circumstances may change. But my approach would be to try to get rich by building a portfolio of top blue-chip stocks that I could hold for years to come.
