I’d drip-feed £500 a month into cheap shares in this stock market rally

I think buying cheap shares on a regular basis could lead to high returns in the long run from a possible stock market rally.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Lady researching stocks

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The recent stock market rally has pushed the prices of many shares to higher levels. However, it’s still possible to purchase cheap shares from across the FTSE 350.

Buying companies at low prices could mean there’s more scope for capital gains in the long run. As such, now could be the right time to start investing £500, or any other amount, in a diverse range of companies ahead of potential stock market growth in the coming years.

Identifying cheap shares after the stock market rally

Clearly, different investors will have differing views on what constitutes a cheap share. However, it’s likely to be based on factors such as their future prospects, recent profitability, track record of growth and the value of their assets. For example, a company that has a low price-to-earnings (P/E) ratio versus its historic average, or compared to its sector peers, may be viewed by some investors as a cheap stock.

Some cheaper companies could be trading at low price levels because of difficult outlooks, or because they have weak financial positions. However, at the present time, some high-quality businesses appear to have low valuations because of weak investor sentiment.

As such, they may provide opportunities to experience capital growth over the long run. A lower share price would potentially offer greater scope for capital appreciation versus an expensive valuation.

A long-term stock market rally

As mentioned, the recent stock market rally has pushed the prices of many stocks, including some cheap shares, to higher levels. In the coming years, a further rise from the stock market’s current level is by no means guaranteed.

For example, risks such as coronavirus and the financial implications of disruption on various industries may cause an economic slowdown that lasts for a prolonged period of time.

However, history suggests that an economic and stock market recovery are likely to take place in the long run. As such, investing in cheap stocks on a regular basis could be a viable means of building a surprisingly large portfolio.

For example, investing £500 per month at an 8% return that matches the FTSE 100’s historic total return would be worth £480,000 in a 25-year time period.

Potential risks are ahead

As ever, investing in cheap shares is a risky pursuit. There’s a very real chance of loss in future, as the stock market experiences an uncertain period partially caused by coronavirus.

However, this threat may have been factored into the valuations of some stocks. Even after the recent stock market rally, there seem to be opportunities to buy high-quality businesses while they trade at low prices.

Buying them on a regular basis could produce attractive returns over the long run that improves an investor’s financial position in the coming years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

2 quality UK shares to consider buying near 52-week lows

Sometimes, a cyclical downturn can create a great buying opportunity. In this spirit, Stephen Wright has a couple of UK…

Read more »

Investing Articles

2,475 shares in this overlooked FTSE 100 dividend gem could make me £9,532 a year in passive income over time!  

This FTSE 100 stock has one of the highest yields in the index, which could generate a big passive income,…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Down 16%, but with a P/E of just 7.2 and 5%+ yield do Lloyds shares look an unmissable bargain to me?

Lloyds shares have dropped significantly recently, leaving the stock looking undervalued on some measures, but does it look like a…

Read more »

Investing Articles

Are cheap shares better?

Do cheap shares make a better option for investors compared to higher valuation alternatives? Here are the findings of a…

Read more »

Investing Articles

7 reasons why I won’t touch this FTSE 250 legend with a bargepole!

Our writer’s been looking at the history of Aston Martin, the iconic FTSE 250 car maker, and explains why he's…

Read more »

Investing Articles

Where might the MicroStrategy share price go in the next 12 months? Here are the latest expert forecasts

The Microstrategy share price has skyrocketed by almost 500% since January, but can this momentum continue into 2025? Here’s what…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

Where might the AstraZeneca share price go in 2025? Here’s what the experts forecast

The AstraZeneca share price is down almost 20% since September! What’s behind this drop, and where do analysts think the…

Read more »

Investing Articles

Where could the Legal & General share price go in the next 12 months? Here’s what experts think

The Legal & General share price is looking dirt cheap, with forecasts predicting double-digit growth in 2025. But is it…

Read more »