A Stocks and Shares ISA is the perfect vehicle for beginners to stock market investing, I feel. It gives you control over your investments and the potential to grow your wealth.
Some ISA accounts allow deposits as small as £25 a month, while £100 a month is a popular starting point. Drip-feeding a small amount into the stock market each month is a popular way to invest during a market crash. It’s nigh on impossible to predict the bottom of a crash, particularly when the extent of the damage is unknown. That means small, regular investments can be used to cut the risk and ensure you’re substantially invested once the next stock market rally begins.
Don’t miss the ISA deadline
If you’ve got a lump sum available, then it could be wise to invest it into a Stocks and Shares ISA before the April 5 deadline. You can invest up to £20k tax-free prior to this date for 2019/20 and then do the same after April 5 for the following year.
If you’ve already deposited your cash, you can then drip-feed as much or as little of it into the stock market as you see fit in the weeks and months to come.
Safeguard your portfolio
Portfolio diversification is key to safeguarding your investments. Diversifying means buying stocks in a variety of companies, from a variety of sectors. It’s not something you can do all in one go if you’re starting out with small investments, but bear it in mind as you plan out your future purchases.
Diversification is the alternative to having all your eggs in one basket. It not only defends you against the failure of one company, but it can also shield against sector failure too.
Choose quality over quantity
Choosing quality businesses with a strong track record is sensible at the best of times, but even more important during a crisis. If you’re new to stock market investing, then I think the FTSE 350 is a good starting point. It provides plenty of choices (350 companies) and each of them should have enough liquidity to ensure buying, but also selling, when you want is achievable.
Liquidity is the amount of buying and selling of a particular stock in the market on any given day. If a stock has high liquidity, there’s a lot of buying and selling, so it should be easy to sell your shares whenever you like. If a company has low liquidity, then you may have to sell at a loss if you’re in a rush to get out of the market.
The companies in the FTSE 350 have a high market capitalisation, making them safer investments with high liquidity.
Avoid debt-laden companies
Another way to choose a quality company that will go the distance is by avoiding debt-laden companies.
Cineworld is an example of a company swimming in debt. It leveraged its debt to astronomical levels to expand its empire throughout North America. This was a risky play even in a bull run. It could prove catastrophic if the pandemic leads to a global recession.
A Stocks and Shares ISA with a regular payment plan is an excellent way to take control of your finances. You can become a shareholder and start your path to wealth generation quickly and easily.
