As the years go by and there are seemingly endless demands on one’s cash, it is possible to reach a certain point in life with scantier financial resources than hoped. If I was in that situation, I would start investing in cheap UK shares to hold for the long term as a way to try and build wealth.
Shares and wealth creation
Why would I choose to invest in shares if I had no savings?
First, I do not need savings to do it. Buying a property or setting up my own business would typically require funds upfront. But when it comes to shares, I could start with zero money and simply put aside some spare cash each month or week into a share-dealing account. That makes it more realistic to fit into my financial situation.
Secondly, buying shares lets me get exposure to some large, successful businesses. I am not going to set up the next Unilever or HSBC. But by buying shares in those companies, even on a small scale, I could benefit from their existing commercial success.
Both of those UK shares have global reach. So, even if I limit my investments to the London Stock Exchange, I can still build a stake in some large global enterprises.
Looking at the long term
But how could buying such shares help me build wealth? After all, if people were willing to sell them to me at a certain price, maybe that is what they are worth.
That is where I think taking a long-term approach to investing can be very instructive. Focussing on what I think a company’s valuation may be years or even decades from now, I could decide that the current price of some UK shares is a bargain.
Maybe that is because the firm is in an industry likely to grow dramatically. It could be that a company’s competitive advantage will become stronger over time. Or it may be that a business’s finances are set to improve, for example because it will pay off its debts.
That is why I would focus on buying what I see as cheap UK shares. ‘Cheap’ here does not necessarily mean that the share price is low. Instead, it refers to shares I can buy for much less than I think their long-term value will be.
Buying UK shares for dividends
But capital growth from an increased share price is only one of the ways in which becoming a shareholder could help me build wealth.
I might also benefit from dividends, which are payments a firm makes to its shareholders. Dividends are never guaranteed, even from businesses that have paid them before.
Without savings, starting to put money regularly into shares could hopefully see me generate some passive income within months, in the form of dividends. The amount depends on how much I invest and what the average dividend yield of my portfolio is. Putting £1,000 into shares yielding 5% ought to earn me £50 a year in dividends.
Once I have bought the shares, I own them. So I would be in line for any dividends paid the next year too, or any year after that, as long as I held onto the shares.
