Some people sit outside the stock market for years wondering whether the time has come for them to start buying shares.
The sort of stock market turbulence we have been seeing lately can be scary. But it can also throw up some unusually lucrative opportunities. So for someone with no prior experience of investing in the stock market, might now be a good time to start buying shares?
Starting from the right place
The answer is yes. But I think it is important, no matter what is going on in the stock market, to be ready before investing.
That readiness involves different things. Partly it is about having spare cash to invest. As part of that process, I think it makes sense for an investor to choose the share-dealing account or Stocks and Shares ISA that best suits their own needs.
Another element to someone being ready before they start buying shares is understanding how the stock market works. The sort of whipsawing prices we have seen in some shares over recent days demonstrates clearly that it can be difficult for the market to value companies.
That also applies to an investor. How can they best decide what they think a company is worth and how it compares to the current share price?
Valuation’s critical to successful investing
Over the long run, successful investing involves paying less for something than it is worth. So a new investor (or an old one) needs to have a view on what they think a share is worth.
Just because a share sells for a lower price than before does not mean that it is a bargain. A share price can always fall lower.
I think it therefore makes sense for someone to follow some basic principles from the day they start buying shares. Those include sticking to areas they understand and also only investing when a share price offers a significant margin of safety compared to what they think a share ought to be worth over the long term.
Riding out choppy markets
That said, I do see some potential bargains to consider in the current stock market turbulence. For example, back in 2020, the M&G (LSE: MNG) share price fell sharply with the wider market – meaning it offered an unusually high dividend yield.
The same has happened in recent days, with the share price now 17% lower than it was a month ago.
Dividend yield is a function of a company’s dividend per share and its share price. So M&G’s falling share price has pushed its already high yield up to 11.4%. That is the highest of any FTSE 100 share – and I think it is one investors should consider.
The price fall reflects a risk that stock market turbulence could lead investors to reduce their shareholdings. That could be bad for an asset manager like M&G, it if leads to lower revenues and profits.
But I see a lot of strengths here, including a strong brand, large customer base and proven business model. Dividends are never guaranteed to last, but M&G’s goal is to maintain or increase its payout per share each year.
