The beginning of a new year is a good time to take stock of finances. Often, people plan to start buying shares. But as January progresses, some well-founded resolutions can fall by the wayside.
I do not think starting to buy shares is as complicated as many people fear, nor does it need to take a lot of money.
Imagine I had a spare £365 to invest (equivalent to having put just one pound aside every day last year) and had never done so before. Here is how I would go about getting into the stock market.
Getting ready to invest
To start buying shares, I would need some sort of dealing account. So my first move would be a simple, practical one, namely choosing the right share-dealing account or Stocks and Shares ISA for my personal circumstances.
Learning about investing
Here is a question. Is Apple a good share to buy or not? Different investors have different answers.
That is why, like all shares, Apple sees its price in the stock market move up and down. Sometimes there are more sellers than buyers and sometimes it is the other way around. The price adjusts accordingly.
I think Apple is a great business. It has unique assets and last year made $97bn in profits. That is a vast amount of money. But the current share price means Apple has a market capitalisation of around $3trn. That seems expensive to me, even for such a strong business. Other investors disagree.
Understanding concepts like valuation is important when buying shares, no matter how much is invested.
Setting an investment strategy
But what if I did want to buy Apple shares – ought I to put all £365 into them?
I would not do that no matter how much I liked a share, because even a great company can run into unexpected difficulties outside its control.
That is a basic risk management principle known as diversification. I would apply it from the moment I started buying shares for the first time.
One way to diversify is to buy different shares. An alternative approach with a fairly small amount like £365 could be to buy shares in an investment trust that, in turn, invests in a variety of shares.
But as well as deciding how to manage my risks, I would also think about my investment strategy even before I actually start buying shares. For example, would my focus be on growth, income – or perhaps both?
Finding the right shares to buy
With my approach forming, how could I choose from the thousands of shares available to buy? I would follow some simple principles.
For example, I would not invest in any business I did not understand. I would focus on companies I felt had already proven that their business model could be profitable (that does not necessarily mean it has to be currently) and that I felt had some unique competitive advantage.
Next, I would consider financial factors. How does the balance sheet look and does the share valuation seem attractive to me?
Hopefully, by choosing the right shares today even with just a few hundred pounds, I could lay the foundations for building more wealth over the years to come.
