Years ago, the stock market was reserved for the wealthy. But things are different now. The internet, commission-free trading, and fractional share ownership have made investing more accessible than ever.
However, it can be difficult for a novice to know where to start, especially with limited savings. Here are a few pointers to help an inexperienced investor aim for a healthy six-figure sum from the UK stock market.
Where to start?
Personally, I think a Stocks and Shares ISA is a brilliant thing. With its attractive tax advantages – all capital gains and dividends can be earned tax-free — it’s likely to grow more quickly than some other investment products.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
And by reinvesting dividends it’s possible to benefit from compounding. If all goes to plan, this means the gains keep on getting bigger and bigger.
It’s also important to ensure that an ISA holds a mix of stocks. Diversification is important when it comes to spreading risk.
Finally, I think it’s necessary to invest for the long term. With an investment horizon of decades rather than years, there’s no need to get distracted by short-term price movements.
But even if you haven’t started yet, there’s no need to give up hope. It’s never too late. Just don’t hang about any longer!
The best time to plant a tree was 20 years ago. The second-best time is now.
English proverb
How much?
In my opinion, the best advice is to invest as much as you can afford.
Of course, there are no guarantees that an ISA will grow in value. That’s why you should always aim to have some spare cash available to help cope with life’s emergencies. Some people could be in a position to start with a lump sum. Others might prefer to save little and often.
Those who bought National Grid (LSE:NG.) shares 20 years ago, have done very well. A £1,000 investment on 25 May 2006, would now be worth £1,939. That’s a 94% return, equivalent to 4.7% a year.
But had all dividends been reinvested in buying more shares, the initial stake would now be worth £4,314. That’s a total gain of 332% or 10.6% a year.
A return like this — along with a regular monthly investment — could see an ISA grow very quickly. After 20 years, £100 a month would be worth £73,592.
