A lot of people dream about starting to invest in the stock market. Only some of them do however. Many are put off by feeling they lack what it takes, whether that is knowledge, money, or both.
In fact I think it can be better to start investing sooner with less, than later after saving more. That way, starting faster irons out any beginner mistakes and may be less costly.
With £800, here is how I would start buying shares.
Minimising the knowledge gap
While I do not see a lack of lots of money as a hurdle, what about that lack of knowledge?
After all, with highly trained and well-paid professional investors managing billions of pounds in the stock market, going in without the right knowledge could also be costly.
I do not think that level of expertise to do well is needed. But it is important to get to grips with how the stock market works. For example, learning how to read company accounts and getting to grips with how shares are valued are both important steps.
As billionaire investor Warren Buffett notes, sticking to our “circle of competence” also makes sense. Putting your hard-earned money into companies you do not understand is not investing, but speculation.
Finding shares to buy
Even having done that, a company can turn out to disappoint. So I would spread my money over a few different shares. With £800 I could comfortably invest in three or four.
In my mind, I would want to find a share like Nvidia five years ago. If I had invested £200 in the company shares in 2019, my stake would now be worth over £6,100.
But while many stock market novices dream of finding a share like Nvidia, they are few and far between. Again to learn from Buffett, I would try something obvious — not to lose money, and never forget that I was trying not to lose money!
So I would stick to blue-chip companies with proven business models, clean balance sheets and attractive valuations.
An example of a share I’d buy
To illustrate, consider a share I would happily spend a spare £200 buying, namely GSK (LSE: GSK). Its portfolio of pharmaceutical products is sold worldwide, meaning the British company is able to make substantial profits.
Last year, for example, it earned £5.3bn after tax. The shares sell for a shade over £15 each, so with £200 I could probably buy 13, or so.
The value of all shares in circulation (what is known as the market capitalisation) is £62bn, so the price-to-earnings ratio is around 13. That looks like an attractive valuation to me, given the future earning potential of GSK’s proprietary products, strong brands, expertise and distribution networks.
One risk is that a weak product pipeline could see earnings fall.
GSK offers a dividend yield of 3.8%, so hopefully I would earn close to £4 annually for each £100 I invest now, though future dividends are never guaranteed.
One simple move to get started
Putting my ideas into action requires a way actually to invest that £800 in the stock market. So my first step would be to set up a share-dealing account or Stocks and Shares ISA.
