£3,000 in savings? Here’s how it could be used now to start buying shares – and earning passive income!

Owning shares can be one way to try and target both long-term wealth building and passive income along the way in the form of dividends. It can seem as if it will require lots of money to start buying shares, but in fact it can be done with a fairly modest amount.

In this example, I will consider how someone with a spare £3k could start investing in the stock market.

Being clear about objectives

First it would help for the person to be clear with themselves about what they are trying to achieve. Above, I mentioned the idea of targeting both growth and income. That might be what some people want to target when they start buying shares. For others, passive income is the main goal, while some want to target long-term wealth creation by focusing on growth stocks.

Whatever your goals may be, I think it is worth being clear with yourself about them before you start buying shares. Doing that can make it easier to hunt in the right places to try and find what you are looking for.

Thinking like a big investor

Many of the things that investors with huge sums do also apply to someone on a smaller budget. For example, diversifying across different shares is a simple but powerful risk management strategy.

Sticking to what you know means you are investing, not speculating.

Paying attention to valuation is always important – a good business can make for a bad investment if investors pay too much for it.

Setting up a way to invest

One difference between investing lots of money and investing a few thousand or hundreds of pounds at a time is that minimum charges and commissions can be more painful on small sums.

So before starting buying shares, investors ought to weigh their options when it comes to choosing a share-dealing account, Stocks and Shares ISA or dealing app.

Building a portfolio

With £3k, an investor could easily buy five or six different shares. One I think is worth considering is City of London Investment Trust (LSE: CTY). With its own portfolio of dozens of blue-chip UK shares, the trust offers a degree of diversification.

That portfolio has also been useful in generating spare cash to pay dividends. The trust has grown its dividend per share annually for well over half a century and currently yields 4.2%.

It means that, for every £100 invested today, an investor will hopefully earn £4.20 a year in dividends, even before considering the prospect of a growing payout.

Dividends are never guaranteed, of course, and I do see the trust’s concentration on UK shares as a risk given the weak outlook for the British economy at the moment.

Still, I like the trust’s fairly conservative approach, spread of investments in proven blue-chip companies, and strong focus on paying a growing dividend.