Although there is a lot of discussion about falling share prices at the moment, I think tumbling stock prices can actually present a good opportunity to start investing. Quality companies may be available to buy on the cheap.
I do not think it is necessary to have vast sums of money to start investing. If I had £300 to spare today and wanted to begin my stock market journey, here is how I would do it.
Set up a way to buy and sell shares
I do not think it is usually complicated to buy or sell shares. But I would need some sort of dealing account to do so. That could be a simple share dealing account, or one designed to reduce the impact of taxation like a Stocks and Shares ISA.
Even if I did not expect to buy any shares just yet, I would set an account up. That would mean that when I decided to trade, I could take action immediately.
Consider buying the market
Legendary investor Warren Buffett reckons that many new investors would improve their chances in the market simply by “buying the market”. That means investing in an index fund that tracks a market index such as the FTSE 100. The advantage of such an approach is that it would expose me to a broad range of companies and business sectors. That would help reduce the risk of my holdings, by giving me diversification. With £300 to invest and the impact of dealing charges, it could be hard for me to get much diversification by investing in individual shares.
Buffett also emphasises the importance of buying a low-cost index fund. That would reduce the impact that fund management fees would have on my investment returns. As an index fund can basically be run by an algorithm, not expensive stock pickers, some are very low cost. For example, I would consider putting my £300 into a fund such as Vanguard FTSE 100 Index Unit Trust.
Investing in an active fund
An alternative would be for me to buy an active fund. That is a collective investment vehicle in which the managers actively pick companies to own, such as the Scottish Mortgage Investment Trust.
That gives me the possible advantage of benefitting from focussed managers trying to improve my returns. For example, while Scottish Mortgage has lost 17% in the past year, over a five year-period the Scottish Mortgage share price has risen 215%, compared to an increase of just 4% in the FTSE index over the same time frame.
But active funds can involve higher management fees eating into investment returns. On top of that, they may not give me the diversification I want.
Could I start investing by buying individual shares?
I could get some diversification by splitting my £300 across two or three different companies I chose. Many people do start investing this way.
But as Buffett points out, getting good investment returns in reality is often harder than it looks in theory. Instead of fancying myself as a stock picker the moment I start investing, I think putting my £300 in an index fund at first could help me learn more about the stock market. I would be able to use that education to pick individual shares once I was a more experienced investor if I decided to do so.
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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