I believe investing is for everyone. It doesn’t require a degree, huge amounts of money or specific knowledge or training. All it takes to get started on the investing journey is action. If you have savings of £500 that you want to put to work to grow your wealth, then here’s what I’d do instead of leaving it in a low-interest bank account. Why? Because as Robert G Allen said: “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
There’s nothing wrong with investing relatively small amounts of money – especially if you’re in a position to do it consistently, for example by putting aside some of your wages each month to invest in shares.
However, to really feel the benefit of compounding – where money invested creates higher interest – you need to put aside as much into an ISA as possible.
When it comes to investing £500, the best option depends on what you want to achieve. Do you want to lay the foundations for creating a portfolio to provide income for yourself and your family, or do you want to quickly build up wealth so that you can buy the things you want to buy? The answers to these questions will determine what’s best for you.
For an investor prepared to build a portfolio for the long term, share price growth may be less important than getting started by earning dividends. I’d suggest therefore using £500 to buy an investment trust with a high dividend yield – one offering more than 4%, or an individual share yielding the same amount as a minimum.
For an investor focused on growth, the dividend yield will be less important. Instead, it will be more important to look at financial ratios such as price-to-earnings-growth, which you’ll want to see below 1, and ideally below 0.7. It can be worked out by taking the price-to-earnings (P/E) ratio and dividing by the growth rate of earnings for a specified time period. For companies with higher growth potential, you’ll also want to see management owning a good percentage of the shares. This information can be found in a company’s annual reports, which will be online.
When it comes to dividends, you’ll also want to look at how well the payout is covered by earnings – this is known as dividend cover. The growth of the dividend is also important. You want to see it growing consistently year-on-year.
I’d suggest that when looking for income, focusing on the FTSE 100 is the way to go. This is where many of the biggest multinationals can be found and many have above-average dividend yields. For more agile, potentially higher growth companies, the FTSE 250 might be a better bet, although don’t rule out the FTSE 100. Companies like building equipment leaser Ashtead have strong rates of growth and shareholder returns.
The key, I think, is to take action. So, if you have £500, by all means, do lots of research on which share or investment trust should perform well, but then take the leap and invest.
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Andy Ross does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.