The idea of buying shares for the first time can seem daunting for some people. But that can also mean they end up missing out on some of the opportunities on offer in the stock market. If I wanted to start investing for the first time and had a limited budget of £500, here is how I might go about it.
Why bother at all?
Before getting into the details, one question that might be worth considering is: why bother?
After all, lots of people think the stock market is for investors with large sums to invest, many of them professionals
But we all have to begin somewhere.
I think it actually makes sense to start investing with a fairly modest sum rather than waiting to save up a larger amount. Like riding a bike or driving a car, figuring out how to invest can involve a steep learning curve.
So I would happily start investing on a limited scale, limiting the financial impact of any beginner’s mistakes I ended up making.
Buying funds or individual shares
£500 would be enough to let me buy shares directly in a few different companies.
Or I could invest in funds. They are basically pooled investment vehicles that sell their own shares to investors. Scottish Mortgage Investment Trust and F&C Investment Trust are examples.
I could even spend some of the £500 on shares in individual companies and the rest on funds.
There could be pros and cons of both funds and shares.
A fund should give me more diversification than I would likely get buying just a few individual shares. But often a fund charges management fees that might eat into my returns.
Investing directly in shares could let me follow my best few investment ideas. But diversification is an important risk-management tool and it is hard to diversify effectively by spending £500 on individual shares.
Balancing risk and reward
Risk-management is an important concept.
When people start investing, they sometimes overestimate how well they may do. But just as it may be easier to sit in the pub criticising a cricket team’s performance on television than standing at the crease at Lord’s, choosing the right shares to buy can be more tricky than it seems.
Famous investor Warren Buffett says that the first rule of investing is not to lose money and the second rule is never to forget the first one.
When it comes to balancing risk and reward, I understand that Buffett quotation as meaning a smart investor always needs to remember the risks of an investment, rather than just focus on the potential rewards.
Getting ready to buy shares
If I wanted to start investing for the first time with £500, I would put the money in a share-dealing account or Stocks and Shares ISA.
Then I would learn more about how the stock market works, including concepts like valuation. Valuation matters because even a great business could be a terrible investment if I overpay for its shares.
After that I would start to draw up a list of shares I was interested in buying. I would focus on companies I could understand, that I felt had excellent commercial prospects and an attractive share price.
