Some people are curious about starting to buy shares but have the notion that it will require large sums of money. In fact, I think it’s possible to start investing with a couple of hundred pounds. Here’s how I would do it.
Some challenges of starting small
While it’s possible to start investing on a comparatively small scale, say with £200, that doesn’t mean it isn’t without challenges. I see two key ones, which are connected.
First, most share trades attract some sort of fees or charges. These often have a minimum value no matter how large the trade. That can eat up a disproportionately large amount of a £200 investment compared to a larger amount.
Secondly, in order to reduce my risk, I try to diversify across different shares. But if I am trying to minimise my dealing costs with my £200, it can be hard to diversify much. I would still try though.
Using the £200, I could take a couple of different approaches to start investing.
First approach to start investing: buy a tracker fund
The first would be for me to put the £200 into what is known as a tracker fund. These are basically baskets of shares bought to mirror a well-known index, such as the FTSE 100. There are a few different such funds in which I could buy shares, such as such as Vanguard FTSE 100 Index Unit Trust.
This would give me a couple of advantages. I could benefit from the diversification of the index, even with just £200. Also, as such funds are not actively managed by share pickers, their overhead is low. That can allow them to charge low fees. In fact, that is why legendary investor Warren Buffett reckons most investors ought to put their funds in low-cost index funds.
But there are some disadvantages and risks to this approach too. By tying myself to the index, I might forego larger gains I could potentially get by investing in individual shares, for example. The FTSE 100 index is a broad reflection of economic health. So if there is a recession, the value of my holdings may decrease.
An alternative would be to pick individual share myself and buy them, for example, in a Stocks and Shares ISA.
As an investor, I may think that I can choose individual shares that will outperform the index. That could be in terms of capital growth, but it may also be from an income perspective. For example, I may want to target a higher yield than that offered by an index fund, through investing in a couple of specific companies. But if I pick companies which perform poorly, I risk losing some or even all of my money over time.
£200 would be enough for me to invest £100 in each of two companies. I’d want to minimise dealing and account charges, so first would do some research on what the best share account might be for my purposes. Then I’d take time to figure out which shares met my own personal investing objectives. My £200 might not put me in the big league – but it could be the first step in the journey there!
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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.