Starting to invest can be daunting. There are hundreds of listed companies that you can buy into. The share prices of these firms change every day, meaning you’ll quickly see a profit or loss (although it’s only a ‘paper’ profit or loss until you actually sell). So when looking to invest to get rich by making good buying decisions, there are several things you need to do to in order to give yourself a higher probability of being successful.
So what are they? To start with, one of the clues is in the article title. Investing £1,000 per month, instead of a lump sum in one go, offers you a much more streamlined approach to investing. It allows you to average out the price at which you buy stocks over a period of time. This ‘blended’ rate can mean you get a better overall price than just taking pot luck and buying in one go, hopefully at a low price but maybe ta a high one.
For example, if you’d invested £1,000 from January to June this year, you’d have got a much lower average price due to the stock market crash than just investing the whole amount in January.
Make use of the ISA
I often make a point of suggesting using an ISA. It’s simple but you’d be surprised how many people still just buy and sell stocks via a brokerage account that isn’t attached to a Stocks and Shares ISA. I was even guilty of doing this for several years when I first started investing.
The reason using an ISA can boost the chances of increasing your wealth and trying to get rich is that you don’t have to pay capital gains tax on the profits when you sell a stock, nor on the dividend income you receive. Let’s say you bought Ocado stock in January at 1,250p, and held it for the next year or so. Given the share price is at 2,150p now, let’s say it rose slightly higher to 2,500p. This would be a 100% return on your investment. But outside of an ISA, you would have to pay 15% of this in tax. If you had averaged in with £1,000 a month for several months, this tax bill could be close to £1,000. Ouch!
Invest in high-growth firms
The example of Ocado above is very relevant for aiming to get rich from stocks. Year to date, the share price is up 72%. This is even more impressive when you consider the impact the global pandemic has had on the broader FTSE 100 index. It highlights clearly that even during a downturn, you can still make large returns if you pick good high-growth firms. And while we do not promote a ‘get rich quick’ mentality, picking the right firm can result in high profits in a relatively short period of time!
How do you know which firm will double in value either quickly or over the long term? Well there’s no guarantee. But you can ignore established firms in stagnant sectors. These businesses usually target income payouts to entice investors, rather that outright share price growth. So look more towards FTSE 250 firms that are performing well. A good example is Games Workshop. Also look at firms that have been promoted to the FTSE 100 due to growth.
Overall, you can still make large returns even with £1,000 per month by picking the right high-growth firms and protecting your profits via an ISA. Averaging-in month by month also enables a blended buy-in rate, giving you a higher chance of success.
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Jonathan Smith and The Motley Fool UK have 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.