If I had a spare £1,000, what could I do with it? I might book a holiday, or snap up a fancy new phone. I could start a home renovation project, or buy a case of classy wine. One option I think could help me build long-term wealth is using the money to buy shares. Here is why.
Here today, not gone tomorrow
Some of the alternative spending options seem short-lived. A holiday would end. That home renovation project might freshen up a bathroom or kitchen, but as the years go by the age would likely show more and more.
I think shares in great companies can be different. Unlike many forms of expenditure, spending money on shares today could actually end up giving me something far more valuable in the future, not less.
That is because when I buy shares, I am basically swapping the £1,000 for tiny pieces of a large company like Unilever or AstraZeneca. If those companies grow their profits over the course of time, then that little piece of them that I own could hopefully also increase in value. On top of that, I may even get regular income in the form of dividends while I hold the shares.
How to find shares to buy
The appeal of that is pretty straightforward to me. By aiming to benefit from growing share prices, as well as dividends, I could hopefully see my wealth increase over the years. I would invest in a range of shares, to try and diversify my portfolio. That would reduce my risk if one share did much worse than I hoped, for example. With £1,000, I could invest £250 in each of four different companies.
But how would I know what companies would do well in future? The answer is that I cannot. Nobody can. Even the best-run company can run into some unexpected obstacle to success.
However, I could try to find companies that seemed likely to me to do well, based on what I can judge about them right now. For example, I would look for a company with a customer base I expect to stay the same size or grow over time. I would focus on companies with a business advantage their competitors lack, like a strong brand or proprietary technology.
I would also consider how to value shares. Even a great company can make a bad investment if I pay too much for it. My approach would be trying to spend my £1,000 on shares in great companies selling for an attractive price.
Getting ready to buy shares
I would not need to invest all of my £1,000 at once. In fact, I would not need to invest any straight away. I would wait until I found shares that matched my investment criteria.
Meanwhile, I could get ready to buy shares when I found some I liked by setting up a share-dealing account or Stocks and Shares ISA. I would also start to do my own research. That way, hopefully I could find the right shares to buy for my portfolio.