If I wanted to start investing in shares, one approach would be to spend years saving up a large amount of cash to begin. But I could also start with a smaller amount. That would mean I gained experience in the stock market faster and also build up my personal knowledge of shares.
That is why I would be happy to start investing in shares with, say, £1,000. Here is how I would go about it.
The importance of diversification
Before I even thought about buying any shares, I would want to understand more about what I was about to do and why. One important concept in investing is diversification or, in other words, buying shares in a number of companies rather than just one.
The value of that is reducing my risks. No matter how attractive a company may be, something can happen to it that I do not expect.
Imagine if I had bought Marks & Spencer 20 years ago because of its strength in the British retail sector. As the landscape changed, from the rise of online retailers like boohoo to a growth in discounting by companies such as B&M, I would have seen M&S face business challenges I had not expected two decades ago. My Marks shares now would be worth less than half of what I paid for them 20 years ago.
Buying shares in a range of companies is a way to reduce the importance of any one company in my portfolio. That should reduce the impact if a company does worse than I expect.
With £1,000, I would consider investing £250 in each of four companies.
Finding attractive businesses
How would I choose those four companies? I would focus my search on business areas I understood. That would hopefully make it easier for me to assess a company’s business prospects.
I would then ask myself whether the company operated in a business likely to see strong demand in future. My next question would be whether it had a competitive advantage that could help it compete successfully in the future.
Going back to the example of M&S 20 years ago, applying this approach might have meant I would have avoided it. While I would have expected ongoing demand for food and clothes, I am not sure I would have said the business had a competitive advantage when it came to selling such items.
Share valuation
If I found companies that met my investment criteria, I would then look at their share price. Paying too much for a good share can mean that even if the business does well, my investment does not. So I would consider whether a share price offered me attractive value to buy a little part of the company.
How I would start investing
Once I had identified a few companies that met my investment criteria, I would start investing some or all of the £1,000.
While some shares do very well, many others perform less well. So I would not expect to make a large sum fast by putting £1,000 into shares today.
But if I went about it in a disciplined way focussed on finding great businesses, I could hopefully find some attractive shares that might grow in value over time.
