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Getting into the stock market is a goal some people put off because they think it takes much more money than it really does. In fact, with even £20 a month, it is possible to lay the foundations for trying to build long-term wealth in the market. Here’s how.
Is £20 a month really enough?
Let’s start with that £20 a month. Over one year, that would add up to £240. With more money, an investor could try to build their portfolio faster. But it’s possible to start with £20 a month and go from there. If more money’s available to invest in future, that could speed things up.
But I reckon there’s a lot to be said simply for getting going. Doing that on a fairly modest scale should hopefully make any beginner’s mistakes less costly.
How to start investing
On a practical level, the investor would need an account to put the money in and buy shares. There are lots of different options available when it comes to share-dealing accounts and Stocks and Shares ISAs, so I think it makes sense to look at the choices. Every investor is different.
Before even choosing shares to buy, a new investor could consider some important points about how to invest. For example, what is the right balance between risk and reward (again, what works for one person may not work for another)? And what are some of the practices a good investor likely wants to consider from day one in the stock market?
Building a portfolio
An example of such a good practice is not putting all your eggs in one basket. In stock market parlance that’s called diversification and it is possible even when investing with a very limited budget.
One mistake many new investors make is not being realistic about their expectations. That’s understandable as they lack stock market experience, but I think it is an important thing to watch out for. Some shares do brilliantly, but some go sideways and some do terribly.
So long-term wealth creation is helped by building a portfolio of shares in outstanding companies that are bought at attractive prices — and holding them.
Finding the right shares to buy
But how can a new investor (or an experienced one) decide whether a price is attractive?
Take Tesla (NASDAQ: TSLA) as an example. It has a large customer base and could benefit from further growth in the electric vehicle (EV) market. It has a proven, profitable business model. On top of that, the company’s knowledge of power storage has enabled it to grow a large and rapidly expanding energy storage business.
The Tesla share price is close to $400. On its own though, a share price does not necessarily tell us much about a company’s valuation (we also need to know how many shares there are, for example).
As an investor, I would happily consider buying Tesla shares for my portfolio at the right price. But the current valuation puts me off for now.
Its share price is around 109 times annual earnings per share. That seems very high to me, even before considering risks like fierce competition hurting the company’s profit margins.
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