A lot of people think about buying shares but put it off until they have more money to invest. But I do not think that is necessary. I do not need a lot of money to start investing in shares. Here is how I would begin, if I had a few hundred pounds to invest.
Be clear on objectives
First I would want to decide why I was investing in shares at all. That might sound obvious – people invest in shares to make money. But I do not think it is quite as simple as that.
For example, if I was hoping to watch the value of my investment grow over time, I might decide to focus on what are known as growth shares. But if I wanted to start investing with an eye on funding big expenses in the future, like school fees or a golf club membership, it might make more sense for me to focus on shares that would hopefully pay me regular dividends.
In the beginning, the difference could seem minor. If I was investing £500 in dividend shares, for example, even some of the highest-yielding shares on the market would probably only give me £50 or so of passive income a year. But investment is a long-term activity. Getting into good habits from the very beginning could shape the success of my investment in years to come.
Focus on not losing money
When it came to selecting shares to buy, would the best ones for me be those that could give me the highest financial return?
Nobody knows what financial return a share will provide in future. So instead of focusing only on the possible financial upside, I would do the opposite. When selecting shares, I would start by focusing on those I felt were least likely to lose my money. Hopefully they would make me money. But if they did not, the less money I lost the better.
That may sound strange, but as investor Warren Buffett says, rule number one of investing is not to lose money – and rule number two is never to forget rule number one. Practically, that means avoiding the temptation to invest in potentially very rewarding but highly risky shares. Instead, I would begin investing by looking for companies with lower risk profiles.
How I would start investing in shares
So although a company like Evraz has a very high dividend yield at the moment, the political risks involved mean its share price could plummet. By contrast, a less racy blue-chip like supermarket chain J Sainsbury has less potential upside in my view. I do not expect Sainsbury’s dividend to hit double-digits like Evraz’s. But I also think its risk profile is lower.
It could still fall in price, for example because increased online competition hurts profit margins. But I do not see Sainsbury’s facing the sort of enormous risks to profit Evraz could face from political risks. That said, Sainsbury’s could come a cropper in ways I do not expect. That is why I diversify my share portfolio, to reduce the overall risk. With a small amount to invest, managing my risks smartly would be critical to my prospects of success.