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A lot of people have a vague notion of getting into the stock market to try and build their wealth. But, for one reason or another, not everybody who thinks they might start buying shares actually ends up doing so.
What might they be missing out on?
Here is what £10k invested a year ago could be worth now.
Index tracking
One simple approach to investing in the market without any experience is putting the money into a fund that tracks a leading index.
Over the past year, as an example, the FTSE 100 index of leading British shares has gained about 6.7% in value. So a £10,000 investment would now be worth around £10,670.
On top of that, the index’s dividend yield of 3.6% means that a £10k investment now ought to earn around £360 of dividends annually. Investing at a lower price a year ago, the yield would be a bit higher, so the £10k would now be earning around £380 per year in dividends.
The FTSE is not the only option. For example, an investor could track a US index like the S&P 500. Its value has moved up 9.3% over the past year – not far off a £1,000 gain on a £10k investment a year ago. That does not account for currency movements, though — something to consider when investing in foreign shares.
The S&P 500 yield of 1.3% is far below the current FTSE 100 yield, but it would still mean a £10k investment a year ago would be generating around £140 in dividends annually.
Choosing individual shares
Some investors, including myself, prefer to buy individual shares rather than “buying the index”.
There are pros and cons to both approaches. One thing I watch out for when buying individual shares is dealing costs, fees, and taxes. Index tracker funds can be very competitive in this regard, but when buying and selling individual shares such fees can rack up so it pays to compare different options when it comes to share-dealing accounts and Stocks and Shares ISAs.
Diversification is an important risk management principle. £10k is ample to diversify across a few different shares.
How much an investor would have made (or not) on that sum would depend on the shares they bought.
Finding shares to buy
For example, one share many private investors like for its passive income potential is FTSE 100 financial services company Legal & General (LSE: LGEN).
Over the past year, its price has moved up 10.2%. On top of that, the dividend yield is 8.4%.
Even today, I think this is a share investors should consider whether they are seasoned investors or want to start investing for the first time.
With a strong brand name, large customer base, and deep experience in the lucrative retirement-linked financial services space, I see ongoing potential for Legal & General to do well.
It aims to grow its dividend per share by 2% annually, though dividends are never guaranteed. One risk I see is the future profit gap that could be left by the planned sale of a U.S. business, even though in the short term it will raise cash.
That is one other thing that can be helpful from the moment you start buying shares: taking a long-term approach can be lucrative!
