One myth about the stock market is that it requires a lot of money to start investing. Not only is that untrue, but I actually see some benefits to beginning a stock market journey sooner and with a smaller amount than later, with more funds.
We all hope to avoid beginner’s mistakes, but at least when they happen with only a small amount at stake they tend to be less financially painful.
If I had under £1,000 and wanted to start investing in the stock market, here is how I would go about it.
Question 1: why?
I would start by asking myself why I want to invest. That may sound obvious. But in fact there are different reasons – and they can have an impact on the approach taken. Some people invest to try and grow their portfolio value. Others want to set up passive income streams, thanks to owning shares that pay dividends.
Whatever the reason, I think it is good to be as clear as possible the reason to invest. That will shape the investment decisions you make.
Question 2: how?
For me, the next question is how? Others though, might ask how much?
With under £1,000 I think it is possible to get going in the stock market. The question of how much is not irrelevant though, as I would need to decide what amount to put into any one share. After all, I would aim to start investing as I meant to go on, by diversifying my portfolio.
As to how, I would devise an investment strategy based on my objectives.
To begin, I would aim to keep my risks low, as inevitably I would still be learning. To figure out how to invest and try to achieve my goals, I would want to learn about the stock market in more detail. Specifically, I would dig into questions like valuation.
Question 3: what?
Valuation matters because it drives my returns as an investor (or not). To do well, I typically want to invest in great companies – but I also want to invest at the right price.
As an example, consider Legal & General (LSE: LGEN). The FTSE 100 financial services provider has a number of things going for it. For starters, the market for retirement-linked financial services is huge – and I expect it to stay that way.
Specifically, Legal & General has a number of things working in its favour when competing in that market, from its well-known brand to a large customer base.
The company has sharpened its strategy over the past decade, giving it a clearer focus on retirement. I see that as a competitive advantage when compared to more generalist rivals.
Legal & General faces challenges (as do all companies). One that concerns me is the prospect of an economic pullback leading clients to withdraw funds. That could result in a dividend cut, as we saw during the last financial crisis.
Still, with a 9% yield, that puts it among the most rewarding of FTSE 100 dividend payers, Legal & General is potentially a passive income goldmine, in my opinion. That is why I hold the share in my Stocks and Shares ISA.
This post was originally published on Motley Fool
