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Getting into the stock market need not be a costly business. Rather than spend years saving up, potentially missing great opportunities in the mean time, if I wanted to start investing for the first time, here is how I would do it — next week!
Yes, next week. That is right: I would not spend years saving up. I would get going, now.
Drip-feeding money into an investment account
I would set a goal of how much I could realistically put aside on a regular basis to invest. Everyone’s financial circumstances are different. But in this example, imagine I put aside £8 each week.
That may not sound like much – and indeed the affordability explains why I like this plan.
But over a year, that would already give me more than £400 to spend on shares.
If I kept saving and hopefully made some good choices along the way, that could be the basis of a four-figure stock market account several years from now.
To get going, I would set up a share-dealing account or Stocks and Shares ISA into which to pay the money.
Finding shares to buy
My next move would be to learn more about how the stock market works.
From valuation to unexpected takeover bids, there are things that could shape my long-term success or failure that may not be immediately obvious to someone when they start investing for the first time.
That also explains why, initially at least, I would tread carefully and always balance risk management with my hunt for rewarding share choices.
As Warren Buffett says, the first rule of investing is not to lose money and the second rule is never to forget the first one. Buffett is a stock market billionaire. Although losses are always a possibility, I think his focus on careful risk management is an important one.
Like Buffett, I would focus on buying into great companies with attractive valuations. I would not start investing by trying to achieve massive returns. Instead, I would simply try to do well while not taking large risks.
Pooled investment
I could do that by buying individual shares. With £8 a week, though, it would take me time to build up sufficient funds to stay diversified across multiple individual shares.
That is why I would consider buying an investment trust, such as the City of London (LSE: CTY), as a way to start investing. It invests in dozens of different companies, so by buying a single share in City of London (and indeed many other investment trusts), I would already be achieving some diversification.
The trust has raised its annual shareholder payout (known as the dividend) annually for over half a century. Dividends are never guaranteed, but the trust’s portfolio of blue-chip shares could well help it keep earning income it can pay out to its own shareholders as dividends.
Its price performance has been less impressive, moving up just 1% in the past five years. A sluggish British economy could mean the shares continue to perform weakly, given the trust’s heavy weighting of London shares.
Still, owning it would help me understand more about how markets work. Looking into the stocks it owns – like Shell and HSBC – could help give me more ideas to start investing in individual shares in future.