How to start investing with just £500

Investing is not just for the wealthy. As we live longer and state pension provisions become more uncertain, it’s essential that more and more people invest for their retirement. With interest rates also staying stubbornly low, it’s time to invest for the medium-term. Here’s how.  

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

Contrary to popular belief, you don’t have to be fabulously wealthy to invest. You don’t have to be an expert either. Anyone can find ways to start investing, even if you’re a beginner investing with little money. You just have to set targets and understand the risks you are prepared to take.

Investment providers are making it easier and cheaper to invest, and providing online platforms and portfolio builders that make it simple. You can now buy off-the-peg investment portfolios that match your appetite for risk but let you leave the actual investing to professionals. For those with a bit more confidence, do-it-yourself investing is now also an easy and affordable option.

There are of course no guarantees when it comes to investing. History shows that it’s likely you’ll make money over the long term, but you should not invest anything you can’t afford to lose, and you should always have cash outside your investment portfolio for those emergencies in life.

But if you’ve got just £500 and you’re ready to start investing, here are some options to consider.

Start investing in shares or bonds

You can buy shares in companies or you can lend money to companies through corporate bonds, which are a bit like an IOU (‘I owe you’ document) the company pays back in the future with interest. If you don’t have a financial adviser or broker to deal on your behalf, simply open an online share dealing account with a reputable investing platform. You can buy and sell shares quickly and easily, and you will usually be charged per trade.

Some new investors like to buy shares in a large, established company that is a brand they recognise, like a supermarket chain or a utility company. This way, they already have a good idea of what the business does and how it makes money. ‘Know what you own’ is a golden rule in investing, and it means understanding the business you hold and why you hold them. 

It’s important to remember though that diversification is a very important aspect of any investment portfolio, helping to protect you against big movements in any individual stock price.

Watch Andrew Craig, author of ‘How to Own the World,’ explain diversification

Consider buying investment funds

It’s usually cheaper to buy funds through a fund platform or ‘supermarket’ rather than directly from a fund house. Economies of scale mean platforms can negotiate cheaper deals on behalf of their customers. Usually the platform will have plenty of research on different funds and markets in case you need help choosing the right fund for you.

Novice investors might buy an index tracker fund which mimics the performance of a major market, like the FTSE 100. This can be a straightforward, low cost way to start your investing journey. Many platforms are now offering exchange traded funds (ETFs) which allow you to build a diversified portfolio relatively cheaply and can give you exposure to a wide range of assets, sectors, industries, and investment themes.    

Build your own investment portfolio

If you want to be a little more adventurous, you could select your own investments. This could be a mix of stocks, bonds, funds or whatever you like, in any combination you like. Check you understand and are happy with the dealing costs of selecting investments in this way, and try to make sure you have a variety of investments to spread risk.

You could open a general investment account, or put the assets in a tax wrapper like a stocks and shares ISA, which shields your investment returns from the taxman.

Choose a ready-made investment portfolio

Many firms now offer ready-made or ‘model’ portfolios designed for inexperienced investors who don’t want to choose their own investments. And you can do this with a lump sum investment of £500, and sometimes even less.

You may need to continue making smaller regular savings each month, and the minimum amount will vary between providers but drip-feeding money into the market gradually over time is a good strategy because it helps smooth out your investment returns even if markets see-saw.

Read: Pound Cost Averaging: how you can smooth your investment returns 

Usually providers will offer several ready-made portfolios, and may offer those within ISAs or general investment accounts, and they will help you choose the one best suited to your tolerance for risk. You pay a fee for the investment manager to take care of the day-to-day running of the portfolio and rebalance it as needed.

The cost will typically be lower if you choose a ready-made passive portfolio rather than an active one. A passive portfolio will contain a selection of exchange-traded funds or index trackers which simply replicate the performance of different markets. 

Invest in a ready-made IG Smart Portfolio with just £500

Peer-to-peer lending?

Now something completely different. You can start investing through peer-to-peer lending platforms like Zopa, RateSetter and Funding Circle with as little as £10, and some promise returns of up to 7% a year. You deposit money, whether regularly or as a lump sum, and the platform matches you to borrowers that suit your risk level. So you can choose to only lend to the highest quality borrowers (whether companies or individuals) so there is less chance of the loan going bad, but this will mean you can’t charge them as much interest.

You need to be prepared to lock your money away for a while and, although these sites are regulated by the Financial Conduct Authority (FCA), they are still fairly new and there are no guarantees you will get the returns on offer, or that you won’t lose your capital, so do your research first. Remember that diversification is always important when investing. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.