Often in August the stock market is a sleepy place. Not so this year, as this week’s movements showed. If I had always wanted to buy into the stock market but had never done so, here is how I would start investing this August.
My plan does not require large sums of money. Indeed, below I discuss how I would invest with a spare £500.
Learning about the stock market
My first move would be to start learning about how the stock market works. For example, consider Apple (NASDAQ: AAPL). It is massively successful and hugely profitable. But a good business does not necessarily make for a good investment. That is down to valuation.
Indeed, billionaire investor Warren Buffett has sold a lot of his Apple stake recently – but still owns a lot of shares.
We do not know Buffett’s logic. Is it about valuation (in which case why did he not sell his whole shareholding in the tech giant)? Or might it simply be a case of an investor wanting to diversify his portfolio? I would aim to do that from the day I start investing — £500 is comfortably enough to split across several different shares.
From valuation to diversification. Getting to grips with the basics of how the stock market works before putting money into it makes sense to me.
While doing that, I would choose a share-dealing account or Stocks and Shares ISA that seems to suit my own circumstances and needs, then put the £500 into it.
Choosing shares to buy
My next move would be to make a shortlist of companies I liked as potential investments and, if the valuation was right, start investing.
What do I look for? In many ways, Apple is a good demonstration. I look for a customer market I expect to be large and resilient, as that can form the basis of sizeable sales revenues. I then look for a business that has a competitive advantage that could help it do well within that market.
From its brand to installed user base and proprietary technology to services offering, I think Apple matches those descriptions.
I also consider risks. I think when a lot of people start investing they focus too much on potential reward and do not pay enough attention to risks. As Buffett says, rule one of investing is never to lose money – and rule two is never to forget rule number one.
Apple faces risks such as growing competition from more competitively-priced brands, as well as the spectre of a weakening global economy hurting demand for new smartphones. Still, I would happily own its shares – if I could buy them at the right price.
For now though, the valuation looks high to me. So Apple would not be on my shopping list if I was to start investing this month.
Instead, I would look for other opportunities in the current market that I think may offer me better value when investing in quality blue-chip companies.
