It does not take tens of thousands or even thousands of pounds to start buying shares. In fact, I see some advantages to beginning an investment activity sooner on a more modest basis, without waiting years or decades to save up funds.
It would give me a longer timeframe in which to reap potential investment rewards, for example. Hopefully, it could also mean that any beginner’s mistakes I made would be less costly.
If I had never invested in the stock market before and wanted to use a spare £400 to start buying shares this week, here is how I would go about it.
Starting small and aiming for growth
With £400, it might seem tempting to go for a few small companies that, if things turn out the right way, could go stratospheric.
I would take a different approach, for a few reasons. I am an investor not a speculator and with only £400 to invest I would certainly want to avoid unnecessary risks. Rather than investing in companies that might become massive, I would prefer to invest in ones that are already massive and have proven business models.
By doing that, I would focus on aiming for companies I thought had good long-term prospects and an attractive price, alongside a proven business model. The future is unpredictable though, so I would aim to reduce my risk by spreading the £400 over several different shares.
Finding shares to buy for the first time
With thousands of shares available to buy, where would I start as a beginner? As billionaire investor Warren Buffett emphasises, I would stick to my circle of competence, picking businesses I felt I understood and so could analyse.
I would look for a company I expected could do well in future and had a decent balance sheet. Too much debt can kill even a strong business.
As an example, one share I think investors could consider buying is Dunelm (LSE: DNLM). The business operates in an area likely to see strong long-term demand, as people continue to want to decorate or redecorate their living space.
Thanks to unique product lines and a large customer base, Dunelm has what I see as a solid competitive advantage. It has been consistently profitable and I also like the dividend record. It often pays special dividends when it has spare cash, although no company’s dividend is ever guaranteed to last.
Over the past five years, the Dunelm share price has risen 47%. That means its price-to-earnings ratio (a common valuation metric) is 16, which I do not see as a bargain but think is fair for a business of Dunelm’s quality.
Starting the journey of building wealth
Like any share, Dunelm has risks. A weak property market could hurt sales and revenues, for example. Managing risks both obvious and unseen is a key skill for any investor and one I would start honing from day one.
I would start buying shares by setting up a share-dealing account or Stocks and Shares ISA today, then looking into what businesses appealed to me as investments at their current price.
This post was originally published on Motley Fool
