MARKET COMMENT
How To Invest £1,000

By David Kuo (TMFDragon)
June 3, 2004

If you are new to investing, and have £1,000 at your disposal, where should you invest that money?

There are many, including us at the Motley Fool, who believe this sort of sum is best deployed in an Index Tracker. For most people that is indeed a sensible option. For instance, £1,000 invested in the UK stock market since 1918 would have ballooned to over £300,000 today, after you adjust for inflation.

However, investing in an Index Tracker is unlikely to teach you too much about the ins-and-outs of the stock market. Personally, I would prefer to invest the money in individual companies, which, incidentally, is how I learnt about stock market investing many moons ago. It has also enlivened my dinner-party conversations no end!

To kick things off you need to find a low-cost broker. Many online brokers now charge a flat fee of around £10 per trade. Others may levy an annual charge, though dealing costs may be reduced if you buy and sell shares regularly. However, if you are new to investing, a broker with the lowest flat-rate fee would be a good start. After all, you are not getting married to your broker and can always change dealers later on.

Once you've opened an account with a broker, which isn't that difficult, you are ready to start buying shares. But given that there are thousands of companies to choose from, where on earth do you start?

Personally, I would treat the £1,000 as tuition fee, a kind of self-development charge to learn as much as possible about the stock market. As such I would divide the £1,000 into four equal lots of £250.

You could start by assigning £250 to one of the blue chip companies in the FTSE 100. This index, consisting of the 100 largest UK companies, includes our best-known retailers, telecom companies, and it even boasts the world's biggest drinks maker. There are also miners, drug makers, oil and insurance companies, and of course, most of our banks.

Next, invest £250 in a FTSE 250 company. The FTSE 250 is sometimes known as the mid cap index and it consists of the next 250 largest companies. These shares tend to be volatile but also offer the scope for greater gains. Many high street retailers pepper this index and it is also home to our biggest housebuilders, which are seldom out of the news given the nation's obsession with the housing market.

I would also invest £250 in one of the AIM, or Alternative Investment Market, listed companies. These are much smaller businesses, though small should not be confused with unprofitable. There are lots to choose from, and you may even be pleasantly surprised at just how many companies you recognise.

Lastly, I would invest £250 in a high-risk sector such as biotechnology or telematics. Shares in these companies tend to be very volatile, with massive daily swings not especially unusual.

I believe £1,000 invested in this way could be one of the best ways to learn about the stock market, as it gives you experience of many different types of company. You may even find at the end of the exercise that stock picking is not for you. You could also find that passive investing is a much better option. Whatever the outcome, it should be £1,000 well spent!

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