3 simple steps I’d take before buying cheap UK shares in an ISA today

Taking these steps before buying bargain UK shares could help to reduce your risks and improve your stock market returns, in my view.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Many investors may be tempted to buy cheap UK shares after the recent stock market crash. While they can produce high returns in the long run as the stock market recovers, a number of companies may face challenging outlooks. Therefore, it may be prudent to ascertain their financial strength and long-term growth potential before buying them.

Likewise, ensuring you have sufficient capital available in case of an emergency before purchasing undervalued FTSE 100 and FTSE 250 shares could be a shrewd move. It may enable you to fully benefit from a likely turnaround from current low prices levels across the stock market.

Financial strength of UK shares

Assessing the financial strength of UK shares before you buy them may reduce your risks and improve your returns. Some companies with weak balance sheets that contain a large amount of debt have survived in recent years due to a growing economy. But they may be among the businesses most at risk of folding in the coming months.

Should you invest £1,000 in Vodafone right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Vodafone made the list?

See the 6 stocks

The world economy is set to experience one of its most challenging periods in living memory, as well as a rapid pace of change. This could cause some companies that lack the financial means to change their business models come under severe pressure.

Therefore, ensure any UK shares you purchase have modest debt and access to sufficient liquidity for investment purposes. This could be a simple, yet effective, means of improving your portfolio’s long-term prospects.

Emergency cash position

Just as assessing the financial position of UK shares is important before buying them, so too is ensuring you have sufficient cash available should you require it for an emergency. At present, unemployment is on the rise, and wage growth could be somewhat limited if business performance fails to improve.

Therefore, although cash offers paltry returns at present, having enough capital available to pay for unexpected events could be a sound move. It may mean you don’t need to sell long-term investments at unfavourable prices. This will provide the opportunity for your portfolio to benefit from a likely recovery in the coming years, without being used to fund your day-to-day expenses should cash be required.

Growth opportunities

Another simple step to take before buying UK shares is to consider whether they have the right business model in place within a post-coronavirus economy. It appears as though technology is likely to play a larger part in our lives, with many people likely to work more from home. Similarly, environmental factors seem to be becoming increasingly prevalent across a growing number of industries.

Assessing the business model of any company is subjective. But at least considering the adaptability of a stock before buying it may help you to avoid companies with obvious limitations. This could enhance your ISA’s performance, and boost your long-term financial outlook.

Should you invest £1,000 in Vodafone right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Vodafone made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Hunting for passive income? These falling insurance giants offer 10% yields

The UK insurance sector is typically a good place to look for attractive dividend yields. Dr James Fox details two…

Read more »

Investing Articles

Considering a Stocks and Shares ISA this April? Avoid these mistakes!

When opening a Stocks and Shares ISA for the first time, it's easy to fall foul of some costly mistakes.…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

With global markets down 10%+ investors should remember this legendary quote from Warren Buffett

Warren Buffett is the greatest investor of all time. And he says that the best time to buy shares is…

Read more »

Investing Articles

I asked ChatGPT for the best safe havens in the FTSE 100 amid Trump’s tariffs 

Our writer isn't convinced by the answers that AI assistant ChatGPT rattled off when asked about solid FTSE 100 defensive…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 world-class shares to consider buying in the market sell-off

Looking for blue-chip shares to buy amid the market chaos? Here are two high-quality businesses that Edward Sheldon sees potential…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Consider targeting £8,840 of annual passive income from 363 shares in this FTSE 100 heavyweight stock!

Investing in high-dividend-paying stocks with the returns used to buy more of the shares can generate potentially life-changing passive income…

Read more »

Investing Articles

16% lower in 10 days, does Prudential’s share price look a compelling bargain to me?

Prudential’s share price is down a lot from its one-year traded high, which suggests a bargain to be had. I…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 17% in a week! This FTSE 100 growth stock is one I’m watching

Over the last five years, Informa has shown itself to be one of the UK’s most resilient growth stocks. So…

Read more »