There’s still a misplaced view that stock market investing isn’t for everyone, even though the tax-free Stocks and Shares ISA has been around for over 25 years now.
This is a cultural problem, as figures show the UK has lower levels of retail investors compared to other developed nations. Indeed, the level of household wealth held directly in stocks is around four times higher in the US!
Some people think you need to have loads of money to get started. But this simply isn’t true, as I’ll attempt to show here.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Starting from scratch
As we’re all acutely aware, there’s a cost-of-living crisis here in the UK due to inflation and higher borrowing costs. Therefore, I totally get why most can’t afford to invest anywhere near the £20,000 annual ISA allowance.
However, I think £75 per week is still doable, even if it means sacrificing the odd restaurant meal here and there. The long-term results could certainly be worth it.
For example, £75 a week equates to £3,900 — or £325 per month — across the year. This would make it possible to build a 12-stock portfolio, assuming a different share was bought each month.
The average long-term stock market return is around 9%, with dividends reinvested. Assuming this level of return, the ISA would grow to nearly £31,000 after six years.
At this point, an investor would be receiving around £1,550 every year in dividends, assuming a 5% yield. Nice.
A runaway snowball
However, let things run a bit longer and compounding really starts to snowball.
After 10 years, the ISA grows to almost £63,000 and £3,150 in dividends, with the same 5% yield.
After 15 years, it goes to £123,000 and £6,150.
And after 25 years, the portfolio value reaches £365,000, with annual passive income of £18,250.
All this from £75 per week. Up the figure to £100 from the start and the ISA becomes worth almost £500k after 25 years!
Variance
Of course, these are just representative numbers (and I haven’t included trading/platform fees). In reality, there’s a lot of variance in stock investing. Dividends and even average returns can’t ultimately be guaranteed.
Then again, one or two amazing stocks can turbocharge returns. Just look at Rolls-Royce or Nvidia, both of which have surged 1,100%+ in five years.
Admittedly, nobody was buying either in 2021 for dividends. But there’s nothing stopping an investor from also buying growth stocks to build wealth, then focusing on income later.
HSBC
One I think is worth exploring as a starter stock is HSBC (LSE:HSBA). The banking goliath’s share price has surged in recent years, making it the FTSE 100‘s largest company.
However, the Asia-focused bank is still offering a forecast yield of 4.5%, beating the FTSE 100’s 2.9%. Moreover, the payout is well covered by expected earnings and the stock doesn’t look particularly overvalued.
Of course, being exposed to Asia isn’t always a smooth ride, and more tariffs from President Trump could throw a spanner in the works.
Looking ahead, though, I’m bullish on HSBC’s prospects, and own the stock myself. By 2040, Asia is projected to become the world’s leading economic force, contributing as much as 50% of global GDP.
This is set to mint many new super-rich individuals, which should benefit HSBC’s already booming wealth division.
