Image source: Getty Images
Finance can sometimes seem intimidating, as if entering the millionaires' club is not an option for the small investor. But we all have to start somewhere and I believe that someone can start investing with a very modest sum of money.
For example, if a potential investor had £80 to spare right now and had ambitions to start buying shares, here's how they could make that dream a reality.
Some pros and cons of investing on a small scale
As far as I'm concerned, £80 is enough to start investing, but it's not much.
Therefore, the investor should pay close attention to the minimum fees and charges offered by different options when choosing a shares trading account or stocks and Shares ISA.
There is also the question of diversification. Spreading your eggs into different baskets is a good risk management strategy, but it can be a challenge when investing as little as £80.
One approach could be to invest in a pooled investment fund, such as a unit trust, that in turn invests in dozens of different companies.
It's not all doom and gloom! From a risk management perspective, starting small can mean that any beginner's mistakes are less costly than when large sums of money are at stake.
Plus, £80 is just the start. An investor could set up a standing order or direct debit for a monthly or weekly contribution. £80 a month would mean they had over £1,000 to invest in just over a year.
How to invest from scratch
But aside from the practicalities of investing, how would a new investor with no experience in the stock market find stocks to buy?
It may seem counterintuitive, but I think there is a lot to be said for not aiming high in terms of returns, but rather aiming low in terms of risks.
Or, as billionaire investor Warren Buffett says, “The first rule of investing is not to lose money. And the second rule is not to forget the first rule.”.
In other words, focus more on the possible disadvantages than the possible advantages.
Of course, we would all like to invest in a stock and then watch its price skyrocket. But I think there's a lot to be said for both new and experienced investors to aim for high returns but prioritize managing their risk first.
An action to consider
That brings me to a stock I think new investors should consider: City of London Investment Trust (LSE: CTY).
As the name suggests, it is an investment trust and focuses primarily on British companies. In fact, its largest holdings are well-known names such as HSBC and Shell.
That means investors need to be realistic in managing their expectations when it comes to potential share price growth. In my view, the City of London should behave broadly in line with the British economy.
There is a risk that the stock will perform poorly if investment managers are too confident in a particular investment (for example, the trust is too short of its share in victorex). But that's part of the benefit of diversification.
Also, I like the income prospects. The City of London has increased its dividend per share annually for 58 years.
