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When people think about entering the stock market for the first time, they sometimes believe that it is a very expensive thing to do. In fact, it is possible to start buying stocks with relatively little money.
Actually, I see some advantages to starting on a small scale. Speed, for one thing: I'd go faster if I only needed to save £300 rather than £3,000 or £30,000.
Another advantage I see is that if I start buying shares for just a few hundred pounds, any beginner mistakes I make hopefully won't be financially painful.
Of course, the reason for investing is to make money so that it doesn't get lost. But it pays to be realistic and investing is a long-term project: there are bound to be a few bumps in the road even for the best investors.
A few things I will do first
How would I begin?
My first step would be to set up a shares trading account or a Stocks and Shares ISA. There are many options available, so I can try to choose the one that works best for my circumstances.
Next I will learn more about how the stock market works. A common mistake when you first start buying stocks is to believe that investing in a well-performing business will make a good investment.
I understand why people think that way but don't be misled. A business may be doing well but it is heavily indebted, meaning that liquid operating profit turns into a loss once financing and investment costs are accounted for.
Paying a business more than it's worth – no matter how big the business – can also be a costly mistake. Balance is an important concept to learn!
Starting, but not immediately
After I was so prepared, I would start buying shares – as long as I found what I liked at an attractive price. Otherwise, I would wait.
Notice I said 'shares' is plural. Putting all my money in just one company concentrates my risk unnecessarily. Even £300 is enough to diversify from the day I start buying shares – and I'd like to.
What type of share can I buy first?
I think investors should consider buying such a share City of London Investment Trust (LSE: CTY), that's what I'm going to do.
An investment trust is a pooled investment, so by buying a share like that I would be getting exposure to a diversified city of London portfolio with lots of shares.
Those are mostly from the UK market and include many large ones FTSE 100 names. In the long run, that could help the City of London boost its share price. But its track record here is modest, with the last five years showing a 4% share price growth. If the British economy is performing weakly, the trust's focus on it could hurt its profits.
The stock also pays dividends and increases its payout per share every year since the 1960s!
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