If I wanted to start buying shares and had a spare £500 to do it, how would I go about it? Here are the three steps I would take.
Learn how the stock market works
First I would do some research to understand how the stock market works.
Imagine I went to Greggs from time to time and started to realise that the branch I went to always seemed to be quite busy. There are not that many staff so labour costs might be quite low. It is also a fairly small shop so the rent might be cheap, although perhaps the prime location pushes it up. Other bakers sell their own equivalent to Greggs’ steak bakes, but none is quite like Greggs. So I think Greggs’ product range could help it build customer loyalty.
Thinking about it like this, I might conclude Greggs is a good business that should make big profits. I would be right about that – last year, the popular bakery chain made over £2m in post-tax profit per week! But if Greggs is a good business, does that mean it is a good investment for me?
The answer is: not necessarily. To know whether a business could be a good investment for me, I need to know more about its finances. For example, what debt does it have? I also need to consider its valuation. A great business with an expensive share price could make a bad investment. That is why I would spend time learning the basics about the stock market, such as how I could value shares, before even thinking about investing my £500.
Choose shares that suit my needs
My next step would be to look for shares that match my investment objectives and risk profile. Shares that suit other people might not suit me.
For example, to reduce my risk I would want to diversify across different shares. But it is hard to diversify with only £500. One approach would be to buy some shares that invest in a range of companies, and so offer me some diversification even with a small amount invested. For example, I could buy a couple of different index tracker shares.
But I could also buy individual shares in companies such as Greggs. With £500, I would probably only buy two or three different shares, to stop dealing fees eating up too much of my funds. That gives me some diversification – but not much. So, I would probably be fairly conservative in my approach to risk management. I would start investing by focussing on well-established, large companies that I felt had a strong competitive advantage to support future profits.
I would start buying shares slowly
Once I found the sorts of companies I felt had good prospects and traded at an attractive valuation, I would consider buying them.
But I would not rush. I would take time to start investing slowly, making sure I felt confident I understood what I was doing. I would also look at my performance over time and see what lessons I could learn from my first steps in the stock market. Over time, hopefully that would make me a better investor.