At some point, even today’s most experienced investors were just starting out and making their first steps in the stock market. Right now, a lot of people seem to be considering their own first moves.
Analysis from Investing Reviews shows that, towards the end of September, UK Google searches using the phrase “investing for beginners” grew by over 500%.
If I was beginning to invest for the first time, here is how I would consider going about it.
Start small
It may sound odd, but I would begin on a small scale. In fact, I would consider using an amount like £250.
If the idea of investing is to increase my wealth, why would I not begin with a bigger sum? The answer is that although I would want to increase my wealth, beginner’s mistakes are common in all walks of life. Investing with large sums can be costly.
By beginning with £250, hopefully I can quickly increase my knowledge, understanding and skill level by learning from my mistakes as well as my successes. Once I feel ready, I could then decide to start investing bigger amounts.
At the beginning, I would set up a share-dealing account, or Stocks and Shares ISA, that I could add more money to later.
Learn how to value shares
Next I would start to learn more about the stock market and how to value shares. After all, a lot of successful investors focus on buying shares that sell for well below their intrinsic value, then holding them for the long term. Valuation is an important concept to understand as an investor.
There are a lot of topics that can help demystify investing for beginners. I would want to understand what the price of a share means – and why a share selling in pennies is not necessarily better value than one trading for pounds.
I would also want to understand what a company’s profit means for me as an investor. Earnings are not the same as cash flow, for example, and sometimes a profitable company can run into problems because of cash flow problems.
Another useful topic could be understanding how to spot the sorts of businesses with strong long-term prospects that could help boost their share price over the long term and perhaps also fund dividends.
Knowing how to value shares could help me look at a potential investment like Apple or Darktrace and decide whether it might be a good fit for my portfolio.
Start buying shares
With my new-found knowledge, I could start buying shares. Diversification is an important risk management principle, but it can be hard to do with £250.
That is because transaction fees and charges could eat up a lot of my money if I spread it thinly. But I would still diversify by splitting the £250 evenly across two or three companies.
How would I balance risk and reward in my first steps? I would focus more on managing risk than maximising potential reward. So I would start investing by investing in blue-chips with proven business models, strong balance sheets and what I saw as an enduring competitive advantage.