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Does it take large sums of money to start investing in the stock market?
In a word: no. It is possible with just a few hundred pounds. So, someone with a spare £2,000 certainly has enough to start buying shares.
In fact, that would give them enough funds that they could comfortably diversify across a few different companies, which is a simple but important risk diversification technique.
Getting ready to buy shares
Before buying any shares, it is important to spend some time learning about how the stock market works. Concepts like valuation are complex and may take decades to master – but learning the basics is a good start.
This period is also a useful one to set up a practical way to start investing, such as a share-dealing account, trading app, or Stocks and Shares ISA.
Thinking about portfolio construction
I mentioned that £2k is enough to diversify, for example, across four different companies by investing £500 into each.
It is worth thinking about what one’s overall portfolio will look like. For example, some of the FTSE 100’s juiciest dividends are among financial services firms like M&G and Phoenix. But buying shares of four different companies in a single sector only offers limited diversification.
Talking about dividends, that raises anther question an investor will want to consider when constructing their portfolio: what balance (if any) do they want between growth and income shares?
It is also important to be realistic about risk tolerance. Shares can go down as well as up and not all investors are willing to accept a high level of volatility. Figuring out one’s risk tolerance in advance can help to rule certain shares out, and others in.
One share to consider
For someone who wants to start investing, one share to consider is Scottish Mortgage Investment Trust (LSE: SMT).
I talked above about volatility – and Scottish Mortgage has certainly demonstrated plenty of that. It is 35% higher than it was five years ago, but still 36% below a November 2021 peak.
Partly that reflects the investment trust’s heavy exposure to growth stocks. I see that as a risk if the tech market slows down and prices of some of its holdings like Nvidia and Spotify fall.
But I also see a potential advantage here. Scottish Mortgage’s structure as an investment trust means that an investor spending even a few hundred pounds on the share gets exposure to the dozens of different companies it holds in its portfolio. That includes unlisted companies like SpaceX, that a small private investor could not typically purchase on their own.
No dividend is ever guaranteed, but it is almost a century since Scottish Mortgage last cut its shareholder payout and management has explicitly recognized the importance of its dividend to small private shareholders.
This story originally appeared on Motley Fool
