Dreaming of getting into the stock market is one thing – but making a move so it actually happens is another. Some people want to invest but never start buying shares.
That can be understandable – the stock market can seem like a daunting place, especially during periods of turbulence like right now. But turbulent markets can also offer unusually attractive opportunities.
If someone had a spare £3,000 and wanted to start investing, here is how they could go about it.
Getting ready to invest
The first step would be laying the groundwork.
Part of that involves getting to grips with important concepts like how to value shares. Understanding such ideas is a critical part of becoming a good investor.
Another element of laying the groundwork is putting that £3k into a place where it can actually be used to deal in the stock market.
There is no shortage of options when it comes to setting up a share-dealing account or Stocks and Shares ISA, or choosing a trading app.
Deciding what shares to buy
An effective but simple risk management tool is diversification. £3k is enough to diversify across a few different shares.
The investor has a choice as to what to buy.
One option is individual shares, like Unilever or BP. Another is some sort of pooled investment, like Scottish Mortgage Investment Trust or City of London Investment Trust (LSE: CTY). Or an investor could put some money into both types of investment.
There are pros and cons to both types of choice, although of course it also matters specifically what shares or investment trusts are chosen.
What to look for when investing
I actually see City of London as a potential option someone who decides to start buying shares should consider.
The investment trust sticks to fairly well-known blue-chip companies and has a strong UK focus.
On one hand, that means it is unlikely to offer the strong growth potential of some fast-growing individual shares. Over the past five years, for example, the investment trust has grown 41% while the US S&P 500 index has soared 90%.
But from the day someone starts buying shares they need to consider potential risks, not just rewards. City of London’s asset managers have put together a portfolio that still involves risk (a weak British economy could hurt the valuation, for example) but with a lower level of risk than some racier investment trusts, let alone some individual shares.
Growth, income, or both?
Another attraction in my view is the income potential.
City of London has grown its dividend per share annually since the 1960s. That is no guarantee of future dividends, but it does show the fund managers’ commitment to the objective of generating passive income for their shareholders.
The current yield of 4.5% is above the FTSE 100 average and means that every £100 invested would hopefully earn £4.50 of dividends annually. If someone starts buying shares with £3,000 today, that could mean £135 of passive income per year.
Building a portfolio with higher-yielding shares in it could mean even more passive income in the form of dividends.
