Many people have some vague notion to start buying shares – someday. But they wait and wait, saying they need more money or to understand the stock market better.
I certainly think it is a sensible idea to get to know how the stock market works before investing in it. But putting something off for too long often ends up with one not doing it at all. So, if I wanted to start investing, here is why I would do it now with a few hundred pounds rather than waiting and saving a larger amount to begin investing months or years later.
Making cheaper mistakes
Imagine doubling your money. If you did that with £20,000, you would have £40,000. But if you did it with £250 you would only have £500. That is still a strong return but not exactly the stuff of millionaire dreams!
If it was easy to double one’s money, it might make sense to start buying shares with large sums of money. But the reality is that investing is difficult even for experts. If I was investing for the first time, I may well make some beginner’s mistakes.
In the long term that could help me become a much better investor. But given the chance of learning a cheap lesson or an expensive one, I would rather it cost me as little money as possible. Starting investing on a small scale may mean any gains I make are also fairly small. But — in my view more importantly — it limits how much I may lose as I learn how to become a more successful investor in reality not just theory.
Important principles made clearer
Another benefit I see to starting small is that I might actually learn some of those investing lessons more clearly.
Take diversification as an example. The idea seems easy enough to get your head around: by spreading money across a range of investments, you feel less impact if any one of them performs badly.
With £20,000, that seems straightforward enough. I could put £2,000 into the shares of 10 different companies, for example. But with £250, things do not look so easy. Some shares cost more than £25, to start with. For example, one share in AstraZeneca would already have used up more than 40% of the £250. But aside from price, the key challenge may be commission and fees. Most share purchases have a commission and often there is a minimum charge. If I tried to invest £250 in 10 different shares, such fees would threaten to eat up a large portion of my funds.
How to start buying shares with £250
So I would need to consider alternatives. For example, what if I diversified across just two or three shares? What if I invested in an investment vehicle that itself offered me exposure to dozens of diversified holdings? That is the thinking behind investment trusts like City of London Investment Trust. But they typically carry a management fee. Is that right for me?
The practicality of investing a limited amount like £250 would force me to confront such questions of how to follow key investment principles from day one. That may seem annoying – but actually I think it could help me learn how to be a more successful investor, fast!