Image source: The Motley Fool
Not everyone who invests in the stock market has bags of money. But they do mostly have one thing in common: they invest to try and build wealth.
Each investor has their own approach to that goal. But some commonalities can apply too.
Here are three simple approaches that can help an investor as they try to build wealth in the stock market, even on a limited budget.
1. Always have an investment thesis
People buy shares for different reasons. For example, one investor may put their hard-earned money into a share simply because it has been going up lately and they reckon it has strong momentum.
I see that as speculating, not investing. For me, investing means buying a stake in a business based on how one sees that business’s prospects.
So I think it can always help to have an investment thesis about a share before buying (or selling it). In other words, a smart investor should always have a point of view about what makes a given business attractive – and what is a fair price for it.
2. Take the long-term view
Many successful investors, such as billionaire Warren Buffett, view the stock market not in days or months, but in years or even decades.
There are several reasons why such a long-term approach to investing can make sense. For starters, a successful business can develop its own virtuous circle, becoming even more successful over time.
But another factor is that dealing costs can soon add up. Buying and selling shares regularly can incur a lot of fees, costs, commissions, and the like. On a small budget, those can be particularly harmful as they sometimes have a minimum amount even for small deals.
That is why it makes sense for an investor to compare their options when it comes to choosing a cost-effective share-dealing account, Stocks and Shares ISA, or share trading app.
3. Stick to what you know and understand
Another Buffett strategy that I think makes sense for all stock market investors is to stick to what he calls one’s “circle of competence”.
Each person knows and understands different things. In Buffett’s view, it is not important what exactly your investing circle of competence is – the key point is to recognise it and stay within it.
For example, I own shares in Greggs (LSE: GRG). The baker’s shares have been having a tough time this year and a profit warning this month has not helped the share price or investor confidence.
In making the choice to invest, I have looked at Greggs’ accounts. These are available for free and anyone can view them, as with all shares on the London stock market.
The business model of making and selling food and drinks through a network of thousands of shops is a simple one to understand. I can also visit Greggs shops to get a sense of things for myself.
Indeed, a couple of barely lukewarm savouries lately have made me consider the risk that supermarkets could take some of Greggs’ business just by offering to heat pastries they already sell. A hot summer also risks hurting demand for warm snacks.
But with a proven business model I understand, strong brand and some unique products, I plan to hold my Greggs shares for the long term.
