Finance can sometimes seem intimidating, as if breaking into the millionaires’ club is not an option for the small-scale investor. But we all need to start somewhere and I think someone can start investing with a very modest sum of money.
For example, if a would-be investor had a spare £80 right now and ambition to start buying shares, here is how they could go about making that dream come true.
Some pros and cons of investing on a small scale
£80 is enough to start investing, as far as I am concerned – but it is not much.
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So the investor should pay close attention to the minimum fees and charges offered by different options when choosing a share-dealing account or Stocks and Shares ISA.
There is also the question of diversification. Spreading one’s eggs in different baskets is a sound risk management strategy but it can be challenging when investing as little as £80.
One approach could be to invest in a pooled investment fund such as an investment trust, that itself is invested in dozens of different companies.
It is not all doom and gloom! From a risk management perspective, starting on a small scale can mean that any beginner’s mistakes are less costly than when larger sums of money are at stake.
Plus, £80 is just the start. An investor could set up a standing order or direct debit for a monthly or weekly contribution. £80 a month would mean they had over £1,000 to invest in little over a year.
How to invest from scratch
But aside from the practicalities of investing, how could a new investor with no stock market experience go about finding shares to buy?
It may sound counterintuitive, but I think there is a lot to be said for not aiming high in terms of returns, so much as aiming low in terms of risks.
Or, as billionaire investor Warren Buffett puts it, “The first rule of an investment is don’t lose money. And the second rule is don’t forget the first rule”.
In other words, focus more on potential downside than potential upside.
Of course we would all like to invest in a share and then see its price go stratospheric. But I think there is a lot to be said for both new and experienced investors to aim for high performance but prioritise managing their risk first.
One share to consider
That brings me to a share I think new investors should consider, City of London Investment Trust (LSE: CTY).
As the name suggests, it is an investment trust and it is focussed mostly on British companies. In fact, its biggest holdings are blue-chip household names such as HSBC and Shell.
That means investors need to be realistic about managing their expectations when it comes to possible share price growth. City of London ought to perform broadly in line with the British economy in my view.
There is a risk that the share could do poorly if the investment managers are overly confidence about a particular investment (for example, the trust is badly down on its shareholding in Victrex). But that is part of the benefit of diversification.
Plus I like the income prospects. City of London has grown its dividend per share annually for 58 years.
