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The best stocks for beginners with little money

The Cheapest Aren't Always the Best

When you're just starting out in the world of investing, it can be tempting to look for the cheapest stocks available and experienced investors do this too…

They call it value investing, when really they’re lying to themselves and think a £1 stock is going to go to £10 and they will make 1000% because, well… read on.

I guess if you don't have a lot of money to invest, buying stocks that cost just a few pennies each might seem like a smart move...

However, this approach, known as the ‘small number bias,’ can actually be a dangerous trap for novice investors.

The small number bias is the tendency to believe that stocks with low prices are inherently better investments than those with higher prices.

This bias can lead beginners to gravitate towards small-cap stocks, which are shares of companies with a relatively small market capitalisation…

While these stocks may appear attractive due to their low prices, it's crucial to remember that they are often cheap for a reason…

Small-cap stocks are generally considered riskier investments compared to their large-cap counterparts.

These companies may be less established, have limited financial resources, and be more vulnerable to market fluctuations because of liquidity or opacity in ownership or information.

In the UK, there’s a market called AIM (Alternative Investment Market) and it is FILLED with ‘bad’ companies that are pretty much just pump and dumps…

I’d know — I used to go to their investor lunches when I was a broker!

So, what should beginners with little money look for when choosing stocks?

Well, don’t look at stocks.

Look at exchange traded funds, which own LOTS of stocks and can be bought based on thematic purchases or broad inclusion of companies.

And more importantly, look at ETFs which aren’t too expensive but still have good participation in them.

For instance, these listed below track the SP500, the 500 largest companies in the US…

An excellent option for getting into the SP500 in the UK is below…

Vanguard S&P 500 UCITS ETF (VUAG): This fund tracks the S&P 500 index, which comprises 500 of the largest U.S. companies across various sectors. Current price: £76.25.

Most other ETFs tracking the SP500 are much more expensive than this, so it’s a great option if you are looking to invest with only a little money, and Vanguard is the largest ETF issuer in the world, so you’re in pretty safe hands that it is well constructed and liquid — and yes, these are things you still need to be aware of, even if you are investing with only a little money!

VUAG also provides UK investors with an easy and cost-effective way to invest in a diversified portfolio of U.S. stocks, without the need to open a U.S. brokerage account or deal with currency exchange rates.

For US investors, look to SPY, IVV and VOO as your core SP500 ETFs to hold.

Remember, investing is a long-term game.

Rather than chasing cheap stocks in the hopes of quick gains, focus on building a diversified portfolio of quality investments that align with your financial goals and risk tolerance.

If you use the framework we wrote about for investing when you have a 9-5 and little time, this provides a nice outline as to what we mean here.

By avoiding the small number bias and prioritising fundamentals over price, you'll be well on your way to making smart investment decisions, even with a limited budget.

But when it comes to wanting to understand things deeper and really get into the weeds, hop onto Fink Premium, where you’ll get access to TOP research, daily.