Putting off getting into the stock market can mean that someone who only dreams of making money in it never actually starts buying shares.
That might be because they feel they lack experience. However, everyone has to start somewhere. So if a stock market novice had £3,000 and wanted to start investing, here is how they could go about it.
Understand what you’re getting into
It is possible to begin investing with no stock market experience and build wealth. But it is not guaranteed by any means.
So I think it makes sense for a would-be investor to begin by getting to grips with how the stock market works. When people sell you a share at a certain price, how can you try and judge whether it is a good share to own – and a good price to pay?
Such an approach would also involve taking time to get to understand important risk management concepts like diversifying across a number of shares. And £3k is ample to do that.
Set up a way to buy and own shares
Another simple initial step would be to put that money into an account that can be used to start buying shares. For example, that might be a simple share-dealing account or a Stocks and Shares ISA.
With lots of choices available it makes sense to take time for a new investor to decide what seems to suit their own situation and objectives best.
Finding shares to buy
Along the way, the investor may have their eye on some shares as potential purchases. In any case, now would be a good time for them to start looking.
When it comes to that search, I think a few simple principles can help. One is to stick to what you know and understand. Another is to focus on finding businesses that seem to have a strong investment case – and then consider whether their share price is attractive, even after allowing for a margin of safety. After all, all shares carry risks.
As an example in practice, one share I think new investors should consider is Legal & General (LSE: LGEN).
The FTSE 100 financial services company is focused on the retirement-linked market. That is huge, long-term and fairly resilient in my view. Legal & General has a strong brand, large customer base and business model it has proven can throw off a lot of excess cash.
That surplus cash helps fund a beefy dividend. Currently, the yield is 8.5%, meaning that for every £100 invested, an investor would hopefully earn £8.50 in dividends annually.
Payouts are never guaranteed though. Legal & General cut its dividend per share during the last financial crisis and I see a risk that the next sharp market downturn leads policyholders to pull out money, hurting profits for the firm.
Such risks underline the reason why when someone starts buying shares, it makes sense to diversify – and keep that good practice in decades to come as they try to build more wealth!
This post was originally published on Motley Fool
