The dream of earning lots of money in the stock market is a common one – and something that some people actually make happen. But it does not necessarily take a lot of money to start investing.
In fact, I think it would be possible to get started in the stock market by putting aside just one pound a day. Here is the approach I would take.
Great oaks starting from small acorns
A pound a day might not sound like a lot. But in just one year, it would already add up to £365. I think that saving habit could lay the foundation for greater fortune in future. In part that could come from keeping up the saving habit while hopefully it would also result from investing what I save.
To start, I would set up a Stocks and Shares ISA, or share-dealing account. I would then put my pound a day into it, ready to invest when I found some appealing shares to buy.
Getting ready to invest
But I would not buy immediately. First, I would take time to learn more about how the stock market works.
For example, how could I know whether the valuation of a share seemed attractive or not? How should I try and get a sense of the company’s financial health? What sort of risks ought I to consider when looking at a business I think has appeal?
Learning more about how the stock market works seems like an obvious move to me – yet some people start investing without doing it. That is an unnecessary disadvantage.
Finding shares to buy
Having learned more about the market, I would then make a shopping list of shares I would like to buy.
I say “shares” because one of the important principles from the day one starts investing is diversification. Basically, that means not putting all of your eggs in one basket.
To find shares to buy, I would stick to industries I felt I understood, as that would help me to assess companies. I would look for ones that have some sort of competitive advantage that can help set them apart.
A share I’d consider buying
As an example, consider the brewer of Guinness and blender of Johnnie Walker: Diageo (LSE: DGE).
Drinks are big business. Diageo has non-alcoholic offerings like Seedlip but its business is concentrated on booze. I expect demand for that to remain high.
That said, younger consumers are drinking less than older generations. That is a risk to sales and profits — and explains the move into products like Seedlip.
The company’s strong brand portfolio and some unique product formulations are competitive advantages that help give it pricing power. Diageo has raised its dividend annually for over three decades.
At a price-to-earnings ratio of 20, the Diageo share price is not cheap. For the quality of the company though, I think the price is fine. I would consider buying it at that valuation if I had spare cash to invest.
