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How much money does it take to start investing? Some think the answer is “a lot”. However, it can take a long time to save up large sums of money. And starting on a small scale can mean beginner’s mistakes are less costly.
Although I am no longer a novice, this is still the approach I take. If I invest in a company for the first time, I prefer to do so on a modest scale. As I get to know it better, I then decide whether or not to increase my stake.
That also explains why, based on my experience, were I to start buying shares for the first time again, I would do so using a smaller not a bigger sum of money.
Using £500 to get going in the stock market may offer me less potential for reward than if I used £5,000 – but it also means much less money would be at risk!
The practicalities of getting started
How much to invest is only one of the considerations people need to make when they start investing.
Another is how to invest on a practical level. I am happy using a Stocks and Shares ISA. But as there are lots available, I spend time to try and choose one that best suits my own financial needs and objectives. The same applies when I invest through a Self-Invested Personal Pension (SIPP) or share-dealing account.
It is also important to get to grips with how the stock market works. A great business does not necessarily make for a great investment. If I pay too much, I could end up seeing my shares fall in value even though the company does well.
So things like learning how to value shares are necessary activities when learning how to invest, as far as I am concerned.
Finding shares to buy
It is tempting to start investing by looking for one amazing share that looks set to explode in value. If investing just a few hundred pounds to start, the temptation to stick to one choice can be even stronger. That is the opposite of my approach. No matter how big or small an investment portfolio is, I think diversification is always an important risk management tool.
I also prefer to stick to proven, blue-chip businesses. Even if their short-term growth opportunities may not seem explosive, over the long run such shares can turn out to be lucrative.
Investing for the long term
As an example, one share I think investors should consider is Reckitt (LSE: RKT). The business has had a challenging few years. Indeed, the Reckitt share price is now 20% lower than it was five years ago.
That may not sound like the stuff of investor dreams. But past performance is not necessarily a guide to what will happen next. The price fall has brought Reckitt down to what I think is a more attractive valuation when considering the FTSE 100 company’s long-term prospects.
It reflects risks such as legal costs for ongoing infant formula lawsuits – something I still think may hurt future profits.
But with a large addressable market, strong brands such as Vanish and Woolite, and a large existing customer base, I expect the firm has the potential to make large profits in coming years.
