The stock market is becoming increasingly accessible for a wide variety of investors. While in previous decades the cost of investing in terms of commissions was prohibitively high, today the internet means that it’s possible to build a surprisingly large nest egg from investing only £5 per day to around £152 per month.
Furthermore, it’s possible to diversify, obtain dividends, and generate capital growth from investing small amounts often. Here’s how I would achieve those goals from investing such amounts in UK shares.
Costs
Even with online share dealing now widely available, the cost of buying shares can still be relatively high for small investors. Often the cost is around £12.50 per trade. Even if undertaken monthly, this would mean it still eats away at an investor’s potential profit.
However, it’s possible to significantly reduce the cost of investing. A range of share dealing providers offer aggregated services. This is where your order is combined with the orders of a variety of the company’s customers, and a specific date (but not always time) is set for the order to be executed. Although this means less control for the investor in terms of the price they will pay for their shares, it can mean the cost per purchase is as low as £2. In the long run, reducing commission costs could have a positive impact on overall returns.
Diversify
Investing £5 per day doesn’t have to mean you give up your chance to own a diverse range of stocks. Tracker funds for the FTSE 100 and FTSE 250 are widely available and provide access to a large range of stocks for a low fee. In many cases, there are no initial charges for investing in tracker funds, while their ongoing costs can be less than 0.2% per year.
Although they will not perfectly track their chosen index, such funds provide a small investor with a wide range of opportunities which can help to reduce company-specific risk within a portfolio. Doing so could mean reduced risk and volatility over the long run.
Of course in time, an investor may wish to buy shares in individual companies. But to begin with, tracker funds could be a sound starting point while they wait for their portfolio to be large enough to warrant investing in a variety of shares, while maintaining a diversified range of companies.
Long-term growth
One of the main difficulties of investing is remaining patient over a long time period. While it’s tempting to buy and sell frequently in order to try and maximise returns, the long-term prospects for indices such as the FTSE 250 may be relatively sound.
For example, over the last 20 years, the index has generated a total return in excess of 9% per annum. If an individual invests £5 per day in the FTSE 250, and achieves that same return in future, they will have a portfolio valued at around £250,000 after 30 years. As such, now could be the right time to start investing – even with a relatively small amount each day.
