The stock market has been gently moving upwards lately. There have been no downward shocks or upward surprises recently. If I were just starting to invest, I’d much rather begin in this kind of environment than during a period of extreme volatility. For two reasons. First, a consistent rise indicates that my capital will grow over time. And then, there is no urgency to invest right now for fear that a sudden spike will happen and I can miss the boat.
So if I had my first £500 to invest, here is what I would do in three steps.
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Step 1: narrow down the field
I tend to be somewhat risk averse. So stocks of high-performing companies are ideal for me. These will typically be FTSE 100 companies. The FTSE 100 index includes the biggest companies listed on the London Stock Exchange’s main market.
These companies’ size is measured by their market capitalisation, which is the product of their share price and the total number of shares. The one big advantage of these stocks is that they are easy to buy and sell. So if I buy them, I do not have to worry that they will be difficult to sell at a later date. Also, these are typically long-established companies that have performed well over time.
Step 2: keep up with latest updates
Once I know that I am focused on FTSE 100 companies, I would keep up with the news flow on them. News and views on the index and its constituent companies is available across financial media. These include the Motley Fool, which regularly publishes articles on them.
The news I would be most interested in is companies’ results. This is because performance generally determines how a share price behaves over time and also whether or not it pays dividends. I would make a note of companies that report any other positive updates. These other updates can include policy changes beneficial to the segment the company operates in or its expansion into high-growth markets, as examples.
Next, I would take a quick look at its performance over time. The two quick financial figures I would definitely not miss are revenues and profits. If revenues are growing, it means the company is expanding, which bodes well for the share price. If its profits are growing too, chances of dividend increases are there as well. A side note here: I buy shares of loss-making companies only if they are fast growing.
Step 3: take the plunge
The next step is to decide which of the companies I had noted down are performing the best. I would also look at their share price. If a company has an uninspiring share price trend despite strong performance, I would think twice before buying it. Mostly though, in my experience, share prices of financially healthy companies rise over time.
I would base my decision on a blend of healthy financials and extent of share price increase. At the very start, with £500 to invest, I would not buy more than one or two FTSE 100 stocks. But I would keep building up my portfolio over time.