A lot of people dream of making money in the stock market but do not even make the first step of buying shares.
There may be reasons for that, such as thinking they need more expertise about money before they start investing. But, as the saying goes, you’ve got to be in it to win it.
In fact, it’s not necessary to have a lot of money before getting into the stock market.
On the other hand, I do think understanding how it works is important. But in this day and age, it’s easier than ever to learn about important concepts like valuation and building a diversified portfolio even on a limited budget.
With just £300 to start, here’s how a stock market beginner could start to build serious wealth.
Living in the real world — not the fantasy one
Let me clear. I’m not suggesting that a few hundred pounds can miraculously turn into millions.
But there are, as I see it, four key variables that determine how much wealth someone builds in the stock market. Let’s look at each in turn.
Variable one: how much you invest
First is the amount of capital invested. All other things being equal, you’ll make (or lose) twice as much money investing £600 as with £300 and twice as much again with £1,200, not £600.
Everyone’s financial situation is different. But while it’s possible to start investing with, say, £300, building wealth would likely happen quicker if an investor continued to contribute regularly.
Variable two: investing over the long term
Time can be the smart investor’s friend.
For example, £300 compounded at 8% annually would be £648 after one decade, nearly £1,400 after two decades, and over £3k after three decades.
Variable three: minimising fees and costs
A sometimes overlooked factor when investing is how small-seeming fees and charges can chip away at a portfolio over time.
With £300 to invest initially, that could be especially true if an investor gets stung by minimum charges.
So it makes sense to compare different share-dealing accounts and Stocks and Shares ISA to find what suits one’s own needs best.
Variable four: buying great shares at attractive prices
Of course, a critical factor in all this is what shares an investor buys.
To illustrate my approach let’s discuss one share I think stock market beginners should consider: Legal & General (LSE: LGEN).
It has a lot of what I look for when investing.
Large target market? Tick. Competitive advantage due to things like a strong brand, proven model, and large customer base? Tick. Recent history of profitability? Yes.
It is also a generous dividend payer, with a yield of 8.9%. That means that for every £100 invested today, hopefully an investor would receive around £8.90 in dividends annually.
In fact, it could be more, as the FTSE 100 firm plans to keep raising its dividend per share annually. But one common mistake stock market novices make is not taking risks seriously enough – and dividends are never guaranteed.
If a stock market crash leads policyholders to cash in, Legal & General could cut its dividend, as it did during the 2008 financial crisis.
Still, I plan to keep holding my shares in the firm.
This post was originally published on Motley Fool
