Some people dream of investing in the stock market but fail to make that dream a reality. If I had that goal and even just a few hundred pounds spare to make it come alive, here is how I would start investing.
Prepare to buy
My first move would be to get ready to buy shares in future by putting the £500 into a share-dealing account or Stocks and Shares ISA.
That way, I would be ready to buy shares as soon as I identified some I felt might fit my investing objectives and style.
Understand the stock market
I would also take some time get to know how the stock market works.
Often, when people start investing, they focus on companies they think have strong long-term business prospects, such as Apple or Tesco.
That makes sense to me – but it is not enough. Buying shares profitably typically involves not only identifying strong businesses, but also buying into them at the right price. So the concept of valuation is also important.
Develop some investment ideas
Having learnt the basics of how the stock market works – such as different valuation methods – my next move would be to start developing some investment ideas.
They could be thematic. For example, what might be the impact of AI on certain businesses? They could be sectoral. For example, what could falling inflation mean for consumer goods makers? Other investment ideas may be specific to a single company. For example, does a business have some proprietary technology that could help it gain a competitive edge?
The business universe is large and each investor has their own circle of competence when it comes to investing. So I always stick to areas I feel I understand and am capable to assess.
Dig into valuation
Having drawn up a shortlist of such businesses, I would then turn my attention to their valuation.
Looking at a company’s current share price, is it fair, does it overvalue the business compared to my own valuation, or do I reckon it is a bargain?
Understanding how attractive a valuation is helps me decide whether or not to invest in a given business. When people start investing, they can be a in a hurry. But patience is an important characteristic for successful investors. If the valuation today is unattractive but the company looks good to me, perhaps in future the share price will fall to a level I think makes sense.
Start investing
Having found attractive businesses trading at what I saw as an attractive valuation, I would be ready to buy shares.
Diversification is an important risk management principle for stock market investors, so I would split my money across more than one company. With £500 to invest, I ought to be able to buy into at least a couple of different companies.
Hopefully, if I choose well, over time I could see the value of my portfolio grow.
