how to start investing your first £1,000

After reading a couple of books some years back I realised – I need to find a way to make money while I sleep otherwise known as passive income. The easiest way I could think off – the stock market. The question I had though – how do I start investing?

Below I want to share my learnings from this journey. I have to start by saying – I am not a financial advisor. The below is just the experience I had while trying to figure out how does the whole investing thing work.

You might already know some of the below while I hope that some of this might be new and useful.

start investing through isa

The very first advice I will give you – no matter what you decide to buy and what tools and platforms to use, make sure they are within the ISA wrapper! If you aren’t sure about what exactly is ISA – read this article and it should give you an easy to digest top line summary of it.

Most investment platforms, banks and apps that you will choose will give you an ISA option. This allows you to invest up to £20,000 per year (relevant as of 2022) and takes away the burden of paying any taxes on the profits you make. The best part is – the benefit stays with you for ever!

While the first £1,000 you invest might not bring you the tax benefit instantly – you will be grateful to yourself in years to come. As your portfolio value grows – the more the tax benefit you will be getting.

ISA will be the best investment decision that you will ever make. The extra returns you will get through compounding due to not having to pay tax will be absolutely crazy!

choose your investment platform wisely

Hopefully the above convinced you to invest through ISA. The next question you will have – where do I open the account? The list of available options is really long.

Banks will have options to open investment ISAs there. Other investment institutions will have a long list of accounts to choose from as well. One of the major benefits I can see with these – easy and simple customer service. You also get a big name your investment sits with – so added level of reassurance that the provider will be there in weeks and months to come.

There will be some issues with the above though – the well known big name financial institutions will be expensive to use. The way they make their money is through commissions they charge you when you buy or sell your investments. On top of that – they also charge a monthly admin fee to hold your investments.

These can really add up when your investment is only a £1,000. For example, I hold an ISA with Barclays who charge me £4 every month for me to hold my cash there + £6 for every buy/sell transaction I make.

The thing I liked about them – opening an account was extremely easy, I could get someone on the phone when I needed them, they offer both online and app experience. 

The other platform I have for some of my investments – HL. Once again – a major and well known name however the fees can ad up. They charge you up to £12 per transaction. It does drop to £6 if you do a certain number of transactions per month.

cheaper alternatives to start investing

Luckily there are cheaper alternatives as well! There are new kids on the block to disrupt an industry that has been there for many decades. The new kids I am referring to are mobile apps. Many of these offer a great service and are significantly cheaper for you to use.

The way these apps make money is by simply benefiting from the spread between the buy and sell price(all the financial institutions are doing this). Different apps will have other ways they can profit from you. It is worth calculating – which of the ways will end up being the cheapest for you.

There are few things worth looking into when it comes to choosing an investment app. Firstly, what are the fees they charge. Some apps can charge you a percentage of your deposit value. Other apps might limit your investment options and require you to pay a fee to unlock a full list of shares and funds. 

Another must – make sure your chosen app is FCA approved and your money is protected by FSCS scheme. In simple terms – if the app goes bankrupt, you would get up to £85,000 of your investments back. This is definitely a nice insurance to have.

If you are looking for some specific apps – check this article out. I feel like the article covers many of the popular apps. They provide a nice summary of benefits and fees for each of these apps. You can look for other alternatives as well. There are a lot of options available to you right now,

what investments to pick in the beggining?

This is the tricky question and there is no simple answer to this. The biggest learning I have that I am happy to share with you – diversify your portfolio. If you put the whole £1,000 into one company – you might win big if the price moves upwards. The big risk however – if the share price drops significantly, your total portfolio will do the same.

Put your money into 4 to 5 different shares and pick them ideally in different industries. Currently I would suggest looking into banking, travel, energy and technology. Look at shares that have low P/E ratios – this can indicate that shares are under valued. Anything below 10 is a great value in my view. 

Do make sure though that the shares you pick are delivering strong returns and have been growing in the past. Consider also adding dividend paying stocks into the mix. This can become a nice passive income source.

The other option, in my view actually much safer as well – buy an index fund. Something like the S&P 500 is known for delivering solid returns – over 10% annually on average for over 100 years. Buying into index fund you also benefit from diversification. S&P 500 tracks the joint value of 500 biggest companies in the US.

You can also invest £600 of your total into an index fund for safer longer turn returns and diversification. The other £400 can be split between 2 companies you like – ideally these would pay you dividend and have low P/E ratio while also having a solid past track record of companies performance. This way you get the experience of picking your own company to invest into but also a benefit of the index fund.

In the below image you can see the annual returns of S&P 500. You will spot that there are indeed some years when you would have lost money. The majority of returns however are well in green! While the past is no guarantee of future performance of course. Index funds are known to be safer investments in the long run which is why I would buy into these with fairly high level of confidence.

summary

Starting your investment journey can be both scary and exciting. I would suggest start with little and see how you feel with the risks you are taking. Make sure you don’t sacrifice the quality of your life by losing sleep for example.

As you spend more time learning about investing you will be able to find a strategy that you are the most comfortable with. Make sure to track your progress to know that you are making positive returns in the long run.

Choose your investment platform wisely – make sure they charge you reasonable amount as well as you are protected by the FCA while using them.

Starting to invest will be the thing you will be forever grateful to yourself in years to come! Be mindful that the value of you investments can fluctuate significantly in the short term.