Today’s question comes from Arshad in Dewsbury:
“Is £500 enough to start investing in FTSE companies?”
The challenges of investing with lower amounts are these:
Transaction Costs Eat Too Big A Percentage Of Your Capital, So You Need A Higher Share Price Rise To Break Even, Which At BEST Means It Will Take Longer
As we teach in Demystifying The Stock Market, there are transaction fees associated with buying and selling shares. The transaction fees are going to be between £8 and £12.50 per transaction, depending on who your stock broker is. And additionally in the UK, you are required to pay stamp duty on your share dealing at 0.5% when you buy shares.
It may be an option to try to reduce that figure by going to one of the brokers that charges lower transaction fees, but at MoneyBlog, we recommend you do not be seduced by lower than average transaction charges from stock brokers. IG is the cheapest reputable company we know of and they charge £8 per transaction. So let’s assume you go with that.
We have summarised the costs and their effects in the table below:
[table id=2 /]
Explainer Video: The Effects Of Transaction Cost On Gains Required To Break Even
… And in case you have difficulty understanding the table, we also created an explainer video!
The Lower The Investment Capital, The More Difficult it Is To Diversify
Additionally, because you only had £500, you cannot afford to divide it up and invest in multiple different companies. You effectively MUST put all your eggs in one basket. Which means if something happens to that basket, you’ll have a long wait until you make a return.
Furthermore, because dealing in FTSE 100 companies generally results on the good side, with a 10-20% return over a year or two, you’re looking at £550-£600 after 24 months.
£50-100 is not meaningful enough (can’t buy you much in the real world) for most people to consider it worth doing.
Save Up & Wait
In investing, patience is king anyway. Because you only control the time you buy and the time you sell, patience is a character trait that is often rewarded.
So put your £500 away in a savings account and add to it when you can until you have a couple of thousand pounds.
Create A Share Club
Nobody on the MoneyBlog team seems to have any experience of one of these but weirdly we’ve all heard about them. The basic idea seems to be that several people who individually have too little capital to make meaningful investments, form a group, club their money together and make group decisions about what to invest the money in. They then share the returns between them.
Buy a FTSE 100 Tracker At The Right Time
You could spend your £500 on a FTSE tracker ETF (Exchange Transfer Fund). Essentially, this is like buying a company which itself holds every share in the FTSE100 in the exact weightings of the FTSE100, such that it will perform exactly the same as the market average.
This would be one way to manage the risk, but rewards will take longer to come and the timing of your investment would be of paramount importance to get the most out of it.
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