Image source: Getty Images
Something I think puts lots of people off the idea of stock market investing is the idea that it needs large sums. Some people tell themselves they will wait until they have saved enough before they start buying shares — and never do.
But how much is “enough“?
Here, based on my own investing experience, I weigh some pros and cons of starting with £5,000 – or £500.
Starting with £5,000
I see at least three advantages to beginning with £5,000. First, dealing fees and commissions can add up. They often have a minimum amount and on small trades that can eat into the sum involved more than on larger trades. So investing on a bigger scale can be more cost efficient.
Second, diversification is an important risk management principle for investors at any level. It is easier to diversify with £5,000 than £500.
With £5,000 I could put £500 into each of 10 shares. If I tried to do that with £500, I would be putting just £50 into each share. Some single shares cost more than that — and my concern about fees eating into my money would still be there.
Third, having more flesh in the game could help motivate me more as I choose shares to own.
Beginning to invest with £500
Not everyone has £5,000 to spare though. Thankfully, not only can beginners start investing with much less, I actually think there are some advantages to beginning with £500.
If I wanted to start buying shares, that concern about dealing fees and commissions would be a real one. So I would take time to look at different share-dealing accounts and Stocks and Shares ISAs to decide which one suited my own needs best.
Investing takes time to learn and I think that doing it is part of that learning process. Knowing the theory is different to putting it into practice.
A lot of investors make mistakes when they start buying shares. One benefit I see of starting on a smaller scale is that the cost of such beginners’ mistakes would hopefully be lower.
Different routes to diversification
What about diversification with £500? I could still diversify across some individual shares, for example spreading the money over two to three different companies.
But an alternative approach to spreading my risks would be to buy shares in an investment trust.
To illustrate, I will use one I bought recently, Henderson Far East Income (LSE: HFEL). The trust invests in dozens of different companies. So by buying its shares, I get the benefit of diversification even by buying a single share.
There are risks with actively-managed investment trusts, such as managers making bad decisions about how to allocate assets. Henderson Far East Income’s share price has tumbled a third in five years. That is hardly the stuff of investor dreams!
On the other hand, it has a dividend yield of 10.3%. I am hoping that growing Asian economies could propel both the share price and the dividend per share upwards. But if there is ongoing weakness in those economies, the opposite may happen.
I like the passive income prospects of the dividend, as well as the diversification this investment trust offers me.
