The idea of getting into the stock market can be an exciting but daunting one. For example, one concern some people have is that it is not possible to start investing without a large sum of money.
In fact, that is not the case. Personally I see some advantages to starting on a smaller scale and trying to keep the cost of any beginner’s mistakes as small as possible.
If I had a spare £300 and had never invested before, here is the approach I would take to getting started this month.
Learn, learn, learn
First I would try to understand more about how the stock market actually works. It simply is not the case that investing in a successful company will automatically help me make money.
I need to understand the future prospects for a company – and also how well (or not) its current valuation reflects those prospects.
Getting ready to invest
Even with £300, I would want to manage my risk by spreading my choices across more than one share.
But before I could spend a single penny in the stock market I would need to have a way to use my £300 to buy shares.
So I would set up a share-dealing account or Stocks and Shares ISA. There are lots available and maybe in future I would want one I could stuff with cash, but in the beginning I would consider my planned initial budget of £300. I would pay attention to things like minimum fees and commissions, when looking for an account that suited my own financial circumstances best.
Great habits from day one
I would not start investing with the dream of turning my £300 into a million pounds. I would not even expect to turn it into £1,000, pleasing though that would be (and, in practice, it might happen).
Instead, I would start by following the billionaire investor Warren Buffett, who says that the first rule of investing is not to lose money and the second rule is never to forget the first one!
In other words, my focus would be not on trying to make as much money as possible at first, but rather on managing my risks closely while I learned. In fact, I would not use that risk-minimising approach only when starting to invest – like Buffett, I would carry it through the rest of my investing decades.
Starting simple
An example of the sort of share I think new investors should consider buying is City of London Investment Trust (LSE: CTY).
As an investment trust, it invests in dozens of different companies, helping my diversification. Those are mostly British companies, meaning that City of London faces risks if the UK economy performs weakly.
In the past five years, the share has moved up just 5% — not what most people dream of when they start investing.
Still, in the persona of a risk-averse beginner, I like its conservative portfolio management approach. It also does not hurt that the trust has raised its dividend per share annually since the 1960s.
Its current dividend yield of 4.8% is well above the FTSE 100 average, helping compensate in recent years for the share price’s modest performance.
This post was originally published on Motley Fool
