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What does it take to enter the stock market? Some people want to start buying stocks but keep putting it off because they think it takes a lot of money.
In fact, not only is it possible to invest on a tight budget, but I think it has some advantages compared to waiting for a bigger pot before getting started. One of them is that any beginner mistakes will hopefully be less financially painful.
If you were in the shoes of a friend who has five pounds a day to spare and wanted to start buying shares, this is what I would suggest they consider doing.
Implement the investment mechanics
My first step would be to make sure I have a way to invest!
So, I would open a shares trading account or stocks and Shares ISA and then start investing my £5 a day into it.
Focus on your goals
That money would soon begin to accumulate.
That £5 a day may not seem like much. But in one year that adds up to £1,825, and in 10 years, more than £18,000. As a long-term investor, that's music to my ears.
But accumulating money is not the same as putting it to work. After all, I want to buy stocks. But before doing so, I would take some time to decide what my goals are in the stock market.
Some investors focus on buying companies that they believe have excellent growth prospects. Others are more focused on dividends. Some juggle both.
Buy and hold
Next, I would start buying stocks if I could find what I consider to be great companies selling at attractive prices.
Note that I use the plural. As a novice investor, it can be tempting to focus on a business that looks very attractive.
But diversifying your portfolio is an important risk management tool and I would apply it from day one.
As an investor, not a trader, I would not buy shares in the hope of selling them at a profit soon after. Rather, he would buy a stake in companies he planned to hold for years.
Looking for stocks to buy
What type of stocks would you start buying?
As I mentioned above, my focus would be on buying what I consider to be great companies that are selling at attractive share prices.
For example, this year I bought shares of filteronic (LSE: FTC), which I consider a stock that investors should consider buying.
The business is still quite small. But I think it has a lot to offer. SpaceX is a repeat customer and as it continues to expand its satellite network, I am hopeful that the American space company will be able to submit more orders to Filtronic.
Not only that, but hopefully the fact that SpaceX has purchased Filtronic multiple times will help it attract new customers.
Of course, relying too much on a single buyer can be a bad thing. Filtronic's share price has more than quadrupled over the past year. I think that's largely due to SpaceX sales. I see the risk that if Spacex stops buying from the company, its shares could fall.
But I think its specialized technological capabilities give Filtronic a strong competitive advantage. That's why I'm happy to own this stock.
