Here’s how I would start (or continue!) buying shares for £500

There are many reasons why some people who want to enter the stock market never start buying stocks.

Another is lack of money. But it’s actually possible to invest just a few pounds (or less).

Another is lack of knowledge. But, while the experience may help, the way I buy stocks now is the same way I would if I had my first stock market moment again.

How do I invest £500

If I have £500 to invest, what I do with it depends on how much I have already invested. That’s because an important principle of risk management is separating different stocks in case one (or more!) disappoints.

So, since I already have a diversified share portfolio, I’m happy to put £500 into one share. But I never – I put all my money in one company. If £500 was all I had, then, I would spread it over different stocks.

I want to invest properly, so I use a Stocks and Shares ISA. In some cases, I use a SIPP or would consider using a shared account.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

What I want

Before I start buying stocks, I want to make sure I know exactly what I’m getting into.

So I stick to the areas I think I understand, which means I’m better able to assess the company’s position and prospects. If I don’t understand a particular area, I can always take the time to do research and develop my knowledge about it before investing.

Next, I look for companies that I think have a competitive advantage and a target market that I expect to remain large over time.

One mistake that new and experienced investors alike can make is not paying enough attention to the company’s accounts. If it has a lot of debt on the balance sheet, that can make it unattractive. For-profit companies have gone bankrupt before simply because they couldn’t pay their debts.

I also look at the rating. A good business can make a poor investment if I overpay for its shares.

Putting my money where my mouth is

One assignment that I think exemplifies my approach is my holding FTSE 100 property manager IM&G (LSE: MNG).

The asset management market is huge and I expect it to stay that way for a long time (which is my investment time, anyway).

With a strong brand, long experience in asset management, and millions of customers in many markets, I see M&G as having a competitive advantage.

It aims to maintain or increase its dividends each year (although doing so is not a certainty). With a dividend yield of 10%, the share is a very profitable source of income for me.

Will that last? Another risk I see is that customers withdrawing more money than they put in can hurt profits. In M&G’s non-Heritage business, that happened in the first half of the year.

I will be watching that risk, as I like the 10% yield!