It can seem tempting to being investing in the stock market. But a lot of people simply never do it. If I wanted to start buying shares and had never done so before, here are four key principles I would apply.
1. Start small
Some people spend years saving lots of money to have what they consider “enough” to start buying shares.
But unlike some asset classes, it is possible to spend a relatively small amount on purchasing shares. Not only that, but like most skills in life, beginner’s mistakes do occur when investing. By putting a relatively small amount of money at risk, I would hope to reduce the impact on my finances if I made such errors, or simply had some bad luck.
£500 is not a small sum of money, but it is not huge either. I would start with that, investing it through a share-dealing account, or Stocks and Shares ISA.
2. Focus on ‘what’ before ‘when’
It can be tempting as a beginner to get caught up in a frenzy of market timing. The potential allure of a once-in-a-lifetime opportunity can be hard to resist.
However, I expect the stock market to be there for the rest of my lifetime. Prices may go up and down, but I hopefully have a long timeframe ahead in which to buy shares. So my first focus would be on the “what” – finding great companies in which I could invest.
Only then would I focus on the “when”.
For me, “when” is not about the performance of the market overall. Rather it is about whether a particular share I like is available right now at what I see as an attractive price.
For example, I think Apple is a great business and have owned its shares in the past. Does that mean I would buy it today, or wait? The answer depends on the price at which I could buy Apple shares (and whether I have cash to invest, obviously).
3. Consider risk seriously
As an investor, I have two jobs to do that can help me succeed. That means trying to grow my money and also avoid or minimise risk.
Many people emphasise the possible upside of a given investment – but it is the risk that drags down their performance in the end.
Imagine I invest my £500 evenly in five shares. Four of them increase by 20% and one loses 80% of its value. Even without considering fees (which in real life can eat into profits significantly, in some cases), I would have made no money — despite four of my five shares growing strongly!
Risk is not an abstract concept. It is a critical concept I need to consider when I start buying shares if I hope to succeed as an investor.
4. Diversify from day one
One key risk management tool is spreading one’s investments. That is known as diversification and I would do it from my first day investing.
That is why, in my example above, I mentioned spreading £500 evenly across a handful of shares rather than putting it all into what I thought was my best investment idea.
