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The idea of putting money into the stock market appeals to a lot of people. Yet some of them never actually start investing, despite thinking about doing so for years.
There are different reasons for that but a common one in my opinion is that people think they need a lot of money before they start buying shares. I think that simply is not true. In fact, there can be advantages to starting on a small scale.
If I had less than £300 to start investing, here is how I would go about it.
Why starting small can be smart
There are, admittedly, some potential disadvantages to investing on a small scale. For example, fees and commissions can eat into the money one invests quite heavily compared to being spread across a bigger sum of money.
That is why I would take time to find the share-dealing account or Stocks and Shares ISA that suited my personal needs best.
To start investing with just a few hundred pounds can also offer advantages. My potential losses would be less than if I invested a much bigger sum. Any learning curve typically involves some mistakes and the cheaper they are the better, in my book!
Starting small can also mean starting soon – perhaps right now.
Waiting for years or decades until I have what I think is a sufficiently large sum to start investing could mean I miss potentially brilliant years in the market, forever.
Finding shares to buy
With limited funds I think it can be tempting to choose shares that seem unusually tempting. I would try to avoid this temptation.
For example, consider the gas company Diversified Energy (LSE:DEC). Its shares offer a yield of 30%. So, if the dividend is maintained at its current level, for every £100 I spend on its shares today I could earn £30 in dividends annually.
That could happen. Diversified owns tens of thousands of gas wells. Its business model of buying up aging gas assets is novel and it has been a steady dividend payer over the past few years.
But dividends are never guaranteed.
Diversified has a lot of debt. Its revenues are dependent on energy prices, which have a habit of crashing from time to time. The costs of cleaning up all those old wells once they reach the end of their productive life is also a risk to profitability.
Looking for long-term value
One common mistake when people start investing is to focus too much on a specific feature of a share, like its current price or dividend yield.
Instead I think it makes sense to focus not on share but on the business. Successful investor Warren Buffett often emphasises how he sees shares as small stakes in great businesses.
So when investing, I look for brilliant businesses with proven models I think are sustainable over time and that sell for an attractive price.
But I could be wrong, so I always diversify.
Even investing under £300 would let me do that, either by buying shares in several different businesses directly or buying into a pooled fund that owns a range of different shares itself, such as an investment trust.
