Buying shares can seem like something best suited to the rich. But I don’t think that’s the case. The reason some people are rich today is precisely because they once took the decision to start investing in the stock market with limited funds.
Even with £100, I’d consider buying shares and starting to build a portfolio for myself. Here are three reasons why.
1. Getting used to buying shares
To buy any shares with my £100, I’d need to set up some sort of share-dealing account. Putting that in place today would make it easier for me to trade shares whenever I wanted to in future. So even with a small initial sum, I could already establish something I would need to invest larger sums down the line.
Once I had my account, containing my own money, it could help me in another way. Many people imagine they could have made money because they once thought a particular share would be a good buy. But often they forget the other shares they also liked, that didn’t do as well. People also underestimate the impact of psychology on how investors behave. Having skin in the game is different to holding court down the pub.
That means that, if I put £100 into shares today, I might actually see my investments perform worse than I expected. If so, that’s a cheaper lesson than starting with a bigger amount. Hopefully, my investments would perform well. Either way, I’d learn about my own psychology as an investor. That is valuable knowledge for me if I have bigger sums to invest in the future.
2. Learning the market
As someone with a casual interest in shares, I could read selectively about companies. So, for example, I might zoom in on headlines about a company I liked such as Apple but not bother ploughing through its financial reports.
As an investor, over time, I would hopefully become more disciplined. I would develop my own investing style, whether or not I realised it. To assess whether shares suited my investment criteria, I would start to read more about things like their profit margins, free cash flow, and net debt. Instead of just looking at whether a business was attractive to me, I would focus on whether its shares looked like good value. That can be a very different thing.
The sooner I began that learning process, the better an investor I would hopefully become over time. Starting with £100 would give me concrete motivation to become an informed investor, not an armchair bore.
3. I might start investing and make money
As well as the benefits above, I might actually make money. After all, if I had been able to invest £100 in Apple a year ago, my stake would be worth £136 today. If I had put it in five years ago, my stake would be worth £585 now. I would also have received dividends. Even with limited funds, I might make a profit.
In practice, I wouldn’t have invested my £100 in Apple a year ago, for two reasons. First, a single Apple share cost over £100 then. With limited funds, some shares are simply too expensive to buy. Secondly, I always seek to reduce my risk by diversifying across different shares. I would apply that rule even when investing £100, for example by buying a diversified unit trust.