Here’s how I’d dip my toe in the stock market with £500

A lot of people spend years or even decades dreaming about investing in the stock market without ever actually making a move.

If I had never bought shares before and had a spare £500 I wanted to use taking my first step, here is how I would go about it.

Take time to learn

How much of the £500 would I be willing to lose? £50? All of it? Nothing at all?

That may seem like an odd question to ask. But the stock market can be both a good and a bad place to invest.

A lot of people hope to make money rather than lose any at all. I think that is perfectly understandable. But in most areas of life, doing well requires effort. One does not simply hope to rely on luck. Often there are roadbumps along the way. The same is true for the stock market. Before investing a single penny in it, I would take time to read and research some basic topics so I could build up my knowledge.

For example, one area many new investors do not fully understand is share valuation. Even a good company can make a disastrous investment, depending on the price one pays for its shares. So getting to grips with share valuation is an important step for any investor.

Loss reduction versus gain maximisation

The idea of investing to build wealth is attractive. But, to begin, I would focus more on trying to reduce my risks than on maximising my potential return.

In practice, that means I would shun what I saw as high-risk, high-reward shares. Instead I would stick to potentially dull-seeming blue-chip shares like Unilever and Sainsbury. Once I became a more experienced stock market investor, I could decide whether my personal risk tolerance would allow me to invest in smaller or less proven companies.

That said, even blue-chip shares carry risks.

Sainsbury shares are only 5% higher than they were five years ago — even after rallying over 60% since October.

So I would start as I meant to go on, by diversifying my portfolio across different shares. £500 is enough to let me do that. For example, I could split it evenly across two different companies.

Episodes or storylines

There is a barrage of news about companies and sometimes it can significantly affect their long-term worth.

But it can also be easy to get caught up in the latest piece of news in a way that obscures the bigger picture.

As a long-term investor, I aim to buy into great businesses I think have excellent commercial prospects for years or decades to come. Individual ‘episodes’ such as a dip in quarterly sales, or a sudden boost due to unexpected weather, can distract me from the long-term ‘storyline’.

Does a company have what it takes to succeed in the long run, independently of the inevitable ups and downs along the way?