Image source: Getty Images
How much do you need to start buying shares? £100,000? £1,000? £100? In fact, I think it's possible to start trading in the stock market for even less. Here's how I would start, with £80 a month.
Starting Big vs. Starting Small
£80 a month adds up to £960 a year, so that would be almost £1,000 to invest annually, thanks to the simple discipline of regular and consistent saving.
There are some disadvantages to starting out in the stock market with hundreds or even hundreds of thousands of pounds. For example, minimum commissions or fees can eat into smaller sums at a proportionally greater rate than when investing larger amounts. So it can be worth taking your time and carefully choosing which share trading account is best. What suits one investor may not be suitable for another.
But I also see advantages in starting to invest on a smaller scale.
We all dream of making it big in the stock market, but in reality almost every investor I've ever met has made mistakes along the way, some of them costly. So starting on a smaller scale can make that learning experience cheaper!
Good habits from day one
The approach I would take when starting out buying stocks would be the same one I would continue to use: I would stick to the areas I feel I understand when looking for companies to invest in.
I would also pay close attention to valuation. A common mistake beginners make is to confuse the value of a company with the value of a share of that company. Owning a great business and making a great investment are not the same thing. Overpaying for a share can mean that a brilliant business generates terrible returns.
But one thing you might do differently when you first start investing, compared to later, is to be Even more Risk-focused. For experienced investors, understanding risk is a critical part of investing. But in the beginning, it can be even more important, as some risks may not be obvious to a beginner.
Diversifying with £80 a month may be more difficult than with larger sums, but it is possible, and I would use that strategy from day one.
Finding stocks to buy
An easy way to diversify is to buy a mutual fund that invests in dozens of different stocks. For example, City of London Investment Fund (LSE: CTY) has interests in a variety of blue chip companies, mainly in the London market.
It has a dividend yield of 4.8%, meaning that if I invest £100 now, I expect to earn £4.80 each year in dividends. Dividends are never guaranteed, but City of London has an impressive track record of increasing its payout per share annually over 57 years.
The share price has also risen over the past five years, although only by 5%.
The trust's exposure to the UK means it could miss out on tech booms elsewhere and could also suffer if a weak British economy weighs on the company's profits.
Owning such a stock could help me learn more about how markets work. I think it's worth considering for investors when they start buying stocks.
