It does not necessarily take a lot of money to start investing in the stock market.
For under a hundred pounds per month, I reckon it is possible to start building a stock market portfolio that hopefully could help grow wealth over the course of time – and may even generate passive income along the way.
With £85 per month to spare, here is how I would go about doing that.
Setting up an investment account
My first move would be to set up an investment account that I could drip feed my money into each month.
There are different types available and lots of options. So I would take time to explore the various share-dealing accounts and Stocks and Shares ISAs on offer to help me decide what seemed to suit my own needs best.
Deciding on my investment strategy
Next, I would decide what my objectives are and how I would invest to try and achieve them.
As a long-term investor, my timeline for stock market choices is years and sometimes decades. But while I am willing to be patient, I would still have choices to make early on. For example, what would be the balance between growth and income shares in my portfolio?
I would diversify my portfolio across different shares to reduce the impact if one of my choices turned out to perform disappointingly.
In general, I would start investing with a conservative, risk-averse mindset. All shares involve some element of risk. But by trying to focus on lower-risk choices in the beginning, I could learn more about how the stock market works without hopefully making too many costly beginner’s mistakes.
Costly mistakes
What is an example of such a mistake?
When they start investing, a lot of people buy penny shares of companies they do not really understand. Do not get me wrong – some penny shares can end up doing brilliantly (though many do not). But the move as I described it above is a mistaken way to start investing for two key reasons, as I see it.
Buying a share just because it sells for pennies is confusing cost with value.
The value of a share is what matters as far as I am concerned. A share is not good value just because it sells for pennies. Value depends on the gap between what I pay for something and what it ends up being worth.
The second error is buying shares in a business one does not understand. That is speculation, not investment.
Finding shares to buy
So I would start by investing in a share like Unilever (LSE: ULVR).
I feel I understand its business of manufacturing and selling consumer goods. Thanks to its well-known brands such as Cif, the company is able to charge premium prices. Its target market is vast and likely to remain that way, as people will always want to use soap and laundry detergents.
Although it is solidly profitable, the company does face risks. One is that in the current weak economy, more shoppers might be tempted to trade down to supermarkets’ own brands, hurting Unilever’s revenues.
With an eye on the long term, though, it is the sort of share I would happily tuck away in my portfolio.
