The idea of investing in the stock market can be appealing. But the practicality of where to begin may be daunting. If I had a spare £500 and wanted to start buying shares today for the first time, here is how I would go about it.
Setting objectives
My initial move would be to get clear about why I wanted to invest in shares.
The investment objective matters because it can drive different strategies when it comes to choosing shares to buy.
For example, if I wanted to build wealth over the course of decades, I might be happy to invest in growth shares. By contrast, if I was keen to earn some passive income, then investing in dividend payers like Imperial Brands and Vodafone might be a better match for my objectives.
Learn to earn
I would also spend time – in fact, as much time as possible – getting to grips with how the stock market works.
A common mistake among novice investors when they first start buying shares is to invest in companies because they think they could be huge in the future.
Why might that be a mistake?
The reason is valuation. Each share represents a stake in a company. Add the value of all of those shares together – something known as a company’s market capitalisation – and it gives a sense of a firm’s valuation (I say gives a sense because the business’s balance sheet also matters when it comes to assigning an overall enterprise value).
Even a great business can be a bad investment if I overpay. That is why, even before I started buying shares, I would want to learn about how the stock market works in practice. That includes key concepts like valuation.
To make money investing, I would be looking to buy shares for substantially less than I thought they were worth. Key to doing that successfully would be putting some sort of valuation on them.
Capital preservation
When people start buying shares, they often dream of making as much money as possible.
My approach would be different. Rather than focusing on potential capital growth, my immediate priority would be trying to avoid losses.
That may sound counterintuitive. After all, people invest to make money. But the reality is that the stock market can offer great potential – but also risks for the unwary. In the beginning, if I could avoid big risks, hopefully I could learn some valuable investing lessons without paying through the nose for them.
That is why, rather than investing in racy start-ups, I would start buying shares in blue-chip companies with proven business models. Even if the ‘upside’ (my potential gains) is limited, hopefully my ‘downside’ (or the possible loss in value of my portfolio) would also be contained.
Doing that, hopefully I could learn more about how the stock market really works and also my own psychology as an investor.
To help manage my risks, I would start by diversifying in a small way. Investing £500 would be enough to help me do that. I could split the money across two very different blue-chip stocks, for example. Hopefully over time, my early lessons would prove valuable for my lifelong investment choices.
