A common misapprehension made by those new to investing is that they need to have a sizeable amount of cash in order to begin their stock market journey. Not so.
Setting aside as little as £25 a month — roughly the same amount you might spend on two tickets to the cinema or perhaps a round of drinks at a pub — is sufficient for getting started.
Having decided what sacrifices you can make, here’s what you need to do next.
1: Open a stocks and shares ISA
The first step to beginning your journey is to open a tax-efficient stocks and shares account with an established broker. Choosing to hold your portfolio within an ISA wrapper is an absolute no-brainer since any money you make on the markets will be free from capital gains and income tax. What’s more, you will have access to your cash at all times (although tampering should really be avoided).
2: Sign up for regular savings plans
Recognising that normal commission costs can be prohibitive for those who are only able to save a little each month, most brokers now offer regular savings/investment plans. These allow you to invest on a monthly basis rather than being forced to build up a lump sum to then throw at the market in one go (which could be at exactly the wrong time if they happen to fall shortly afterwards).
Commission on purchases within a regular savings plan tend to be low — around £1-£1.50 per trade — or nothing at all if you’re opting for certain funds. As many experienced investors know, keeping costs as low as possible can have a hugely positive impact on eventual returns.
3: Consider cheap index trackers or exchange-traded funds.
After setting up a direct debit to transfer £25 into your stocks and shares ISA every month, the next step is to decide what to invest in. While this will ultimately depend on a sober evaluation of your financial goals, attitude to risk and how long you intend to stay invested for, an index tracker or exchange-traded fund — such as one that follows the FTSE 100 — can be a good place to start. As well as giving you exposure to, in this case, the biggest 100 companies listed on the London Stock Exchange, these products have very low management fees and pay dividends which can then be reinvested.
While the number of index tracker/ETF providers is huge, two of the best known are iShares and Vanguard. The latter’s Life Strategy range allows those who have no desire to follow the market’s day-to-day movements the opportunity to build a diversified portfolio of shares and bonds, according to their risk appetite in one easy step.
4: Increase your monthly contributions (if possible)
Having begun your investing journey, the next step is to consider ways in which you might be able to increase the regular contributions to your stock and shares ISA.
This need not be complicated or punitive. Refraining from buying that expensive coffee on the way to work for just one day a week could probably add an extra £10-£20 to your regular monthly savings. It may not sound a lot but, thanks to the beauty of compounding (interest paid on interest), this sort of minor sacrifice can actually have a massive impact on your chances of becoming financially secure later in life.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.