The idea of investing in the stock market as a way to try and build wealth is an old one. I still think it has potential today and am investing in some blue-chip shares as I attempt to get richer. Here is how I could go about that buying just a handful of FTSE 100 shares.
Going for quality
There are thousands of shares I could buy in the UK and US stock markets alone. So why might I decide to focus on FTSE 100 shares?
Basically, I like to invest in blue-chip companies with proven business models. To get into the FTSE 100, a firm needs to achieve a certain market capitalisation (as well as meeting some other criteria). That often means that a firm has done well in building its business by having strong sales and a commercial model investors find attractive.
That is not always the case, though. Also, past performance is not necessarily an indicator of what to expect next.
So although I often search among FTSE 100 companies when picking shares for my portfolio, I then look for certain attributes to try and find the sort of blue-chip bargains I hope can boost my wealth. That could be because their share prices grow over time and in some cases also because owning them could mean I earn dividend income.
Finding stocks to buy
For example, I first consider whether a company has a large addressable market that is likely to generate substantial customer demand for years or decades to come. I think the FTSE 100 is stuffed full of businesses that meet this criterion, from financial services providers like NatWest to miners such as Rio Tinto.
Next, I look at a company’s specific competitive advantages that could help it achieve attractive levels of profitability. Again I think there are lots of FTSE 100 shares that have such an advantage. Some have unique brands, such as Unilever and Reckitt.
Others own proprietary technology, as seen at pharma firms AstraZeneca and GSK. Another edge over rivals can come in the form of a well-established complex distribution network, like those operated by National Grid and Shell.
In other words, loads of shares from the flagship UK index meet at least some of my purchase criteria and allow me plenty of diversification.
Valuing FTSE 100 shares
But does that mean that investing in such companies can help me achieve my objective of building wealth?
Not necessarily. Even a great business can turn out to be a bad investment. If I overpay for shares compared to their intrinsic value, I could end up seeing their worth shrink not grow even if the business does well.
Calculating intrinsic value is not an exact science. That is why, as an investor, I spend a lot of effort learning about how to value shares.
If I can use some spare money to buy into the right companies at what I think is a bargain price, hopefully that can help me build wealth over the years. I always keep my portfolio diversified. But rather than buy into loads of different companies, I am focusing my efforts on choosing a smaller number of firms I think offer outstanding commercial potential and an attractive share price.
