Lots of people dream of buying shares at some point – but do not get round to turning that into a reality. However, simply thinking about investing rather than actually making a move is not going to make me richer! If I wanted to start buying shares for the first time, rather than waiting I would do it even with just a couple of hundred pounds.
In fact, I reckon that beginning to invest with limited funds could help teach me some valuable lessons more clearly than if I had a bigger sum to invest. Here are three reasons why.
1. Diversification on a budget
A key risk-management principle I use when investing in shares is diversification. That basically means not putting all my eggs in basket. If I had thought Cineworld was poised for a strong recovery after lockdown and sank all my money into its shares, for example, I would now have a portfolio worth just a tiny fraction of what I invested.
But it can seem easier to diversify when investing large sums. Often, using a share-dealing account involves commissions and fees. There may be a minimum charge per transaction. So when investing just £200, a lot of my funds could be eaten up in charges if I buy lots of different shares.
Although that may sound bad, I see this conundrum of costs as a possible advantage of investing on a small scale. To start buying shares with £200, I would need to figure out how to balance diversification with the impact of charges on my returns. That is a useful lesson for any investor.
2. Learning about the psychology of investing
Before people start buying shares, they sometimes think they could be very successful investing based on some shares they liked before that have since performed well.
But that ‘fantasy league’ style of investing misses out some crucial real-world elements, such as the psychology involved in owning shares. If I buy shares today and tomorrow they fall 20%, what should I do? Ought I to see the new price as a bargain? Or is it a sign that I made a mistake and I should cut my losses?
Such decisions can be challenging – and managing my emotions will be important in making decisions. Investing on a small scale at first can help me learn about this psychology without risking large amounts if I get it wrong.
3. Start buying shares – or parts of businesses?
Another common mistake when people start buying shares is that they only look at the price and do not really understand the business.
But a share is a tiny sliver of a business. To assess its prospects, I think I need to understand the overall business. For example, I own a stake in polymer maker Victrex because I like its business model, not because I expect a short-term jump in its share price.
With a relatively small amount at stake, is it worth spending time to get to know the ins and outs of a business? I think it is – and doing so will help me become more skilled at assessing businesses and reading accounts. That will be important to my long-term returns as an investor, when hopefully I will have bigger sums to put into the stock market.