It’s tempting to dream of having a large sum to invest in shares. But for many of us, that isn’t the reality. Having just £300 to invest at one time is much more likely for many of us, so here’s how I’d go about it.
Margin of safety
If I’m building my investment pot £300 at a time, I want to consider my risks carefully.
The standard advice to reduce risk is to diversify across shares of a few companies. But it can be hard to diversify with a relatively small sum such as £300. If I could use a share-dealing account with zero or minimal fees, I’d still consider diversifying across a few different shares.
But what if transaction fees threatened to eat substantially into my £300 if I traded in several shares?
In that case, I’d invest in a share that broadly tracks a wider stock index. I’d look for a fund run by a large, reputable investment company. The lower the fees, the more of my money could be put to work in the stock market. Doing that, I could use my £300 to get exposure to a wide range of stocks without having to buy them individually myself.
For example, I would consider putting my money in shares of a trust or fund like the Vanguard FTSE 100 index Unit Trust or the iShares 100 UK Equity Index Fund. These invest in baskets of shares to reflect the FTSE 100 index of large companies.
With £300, I couldn’t buy even one share of every FTSE 100 company, but by investing in a fund like this I would get at least a little exposure to the whole FTSE 100.
Building a portfolio of UK shares
Now, what if I already had a portfolio of UK shares and I wanted to use the £300 to add to it?
In that case, I would feel more comfortable about the risks of investing in individual shares. I would get diversification from the rest of my portfolio. So how I would invest the £300 would depend on my goal – growth or passive income.
If I wanted to target growth, the share I’d pick right now would be S4 Capital. I recently outlined why I’m excited about the growth prospects for this digital advertising agency. The S4 Capital share price grew 132% over the past year. If I had invested £300 12 months ago I’d now be sitting on shares worth £696.
That doesn’t mean the S4 Capital share price will continue to grow. A risk is that the company will dilute shareholders by issuing new shares to help fund acquisitions. That could result in a lower price for these UK shares.
Still, with a growing reputation in an industry that is getting bigger, I’d be happy to invest £300 in S4 Capital for my portfolio today.
UK shares for income
For income, I’d be tempted to pick a high-yielding tobacco share like Imperial Brands or British American Tobacco. But I hold a lot of both already, and I want to stay diversified to reduce risk.
So instead I’d go for the conglomerate DCC. Not only does it yield 2.7%, the company has increased its dividend annually for over two decades.
No dividend is ever guaranteed though. A risk here is customers moving to alternative energy sources instead of gas. DCC sells gas in many markets, so that would hurt its revenue.
Christopher Ruane owns shares in British American Tobacco, Imperial Brands and S4 Capital. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. 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.