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How much does it take to start investing in the stock market?
The question is similar to “how long is a piece of string?” Indeed, one thing I like about the stock market is that it is not just for the rich. Investment can be tailored to each person’s individual financial circumstances.
One watch-out about investing with small sums of money is that minimum fees and charges can soon add up. So it pays to take time when choosing a share-dealing account, Stocks and Shares ISA, or trading app.
Starting modestly can offer benefits too. It can mean getting going sooner. Any beginner’s mistakes will hopefully be less costly than if bigger sums were at stake.
How to put £250 to work
Having set up a way to buy shares, it is important to get to grips with some key elements of how stock market investing works before putting any money into shares.
One simple but important risk reduction technique investors use is to diversify across different shares.
£250 may not seem like much but it is enough for diversification, whether by spreading it over a couple of different shares, or buying shares in an investment trust that itself holds a diversified portfolio of shares.
Get rich? Or try to avoid losing money?
When people start investing, one common mistake they make is thinking that even from a couple of hundred pounds they can soon make a fortune.
It is possible to achieve spectacular returns over the long term. But it is also possible to lose money.
One of the beginner’s mistakes I mentioned above is being overly confident when one starts investing. As billionaire Warren Buffett says, “the first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule”.
So I think it makes sense to start buying shares with a firm focus on risk management and modest expectations about potential gains. Once someone becomes more experienced in how the market actually works (not how they imagine it works without having invested in it), they can adjust their risk-reward focus as suits them.
One share to consider
With thousands of shares on the London market alone, it can be difficult to decide how to start investing.
One share I think new investors should consider is J Sainsbury (LSE: SBRY).
It has a number of things going for it, as far as I can see. The market for groceries is large and resilient. Sainsbury has proven its business model over many decades. It has a well-known brand, large customer base, and has expanded its digital offering, including under its Argos brand.
A good business does not necessarily make a good investment – how much it costs is important too. Price-to-earnings ratios are one valuation tool investors use. Sainsbury sells for 16 times earnings. I do not see that as especially cheap, but I think it is reasonable.
One risk I see is tightening household budgets leading some shoppers to move from the likes of Sainsbury and Tesco to discount rivals.
Sainsbury pays dividends. Indeed, it paid existing shareholders a dividend today (11 July).
Dividends are never guaranteed at any company but Sainsbury’s current yield of 4.6% means each £100 invested today will hopefully earn £4.60 in dividends annually.
