When people think about getting into the stock market for the first time, sometimes they believe that it is automatically an expensive thing to do. In fact, it is possible to start buying shares with a relatively small amount of cash.
Actually, I see some advantages to starting on a small scale. Speed, for one thing: I could get going sooner if I only needed to save up £300 rather than £3,000 or £30,000.
Another advantage I see is that if I start buying shares with just a few hundred pounds, any beginner’s mistakes I make will hopefully be less financially painful.
Of course the reason to invest is to make money not lose it. But it pays to be realistic and investing is a long-term project: there are bound to be a few bumps along the way even for the best investors.
A couple of things I would do first
How would I get started?
My first move would be to set up a share-dealing account or Stocks and Shares ISA. There are lots of options available, so I would try to choose one that worked best for my own circumstances.
Next I would learn more about how the stock market works. A common mistake when starting to buy shares is believing that investing in a business that is doing well will make for a good investment.
I understand why people think like that but it can be misguided. A business might be doing well but loaded up with debt, meaning juicy operating profits turn into a loss once financing and investing costs are factored in.
Paying more for a business than it is worth – no matter how great the business – can also be a costly error. Valuation is an important concept to learn about!
Getting started, but not in a rush
Having got ready like that, I would start buying shares – as long as I found some I liked at an attractive valuation. Otherwise, I would wait.
Note I said ‘shares’ plural. Putting all my money in just one company concentrates my risk unnecessarily. Even £300 is enough to diversify from the day I start buying shares – and I would.
What sort of share would I buy first?
I think investors should consider buying a share like City of London Investment Trust (LSE: CTY), that is what I would do.
An investment trust is a pooled investment, so by buying a share like that I would be gaining exposure to City of London’s own diversified portfolio of dozens of shares.
Those are mostly from the UK market and include many big FTSE 100 names. Over the long run, that could help City of London grow its own share price. But its track record here is modest, with the past five years showing a 4% share price growth. If the British economy performs weakly, the trust’s focus on it could hurt its own profits.
The stock also pays a dividend and has grown its payout per share every year since the 1960s!
