How I’d invest £500 in UK shares right now

Starting a UK stock investment portfolio requires no initial capital. In fact, investors with just £500 can get the ball rolling. But there are some critical factors to consider when deciding how to invest this money, especially when it comes to trading costs.

Even investment platforms that support commission-free trading have hidden costs that can generate returns. And we can not forget about the taxman. Using a Stocks and Shares ISA solves the latter problem but often comes with higher account fees. And does not provide immunity for stamps, transaction tax of 0.5%.

Carrying out many transactions will earn you £500. So how can an investor build a diversified portfolio of top UK stocks with only a small amount of capital? Let’s explore some options.

Using the power of funds

Rather than trying to build a UK stock investment portfolio manually, the alternative is to let a professional handle everything. Personal investment advisers can be expensive and they won’t consider managing a £500 portfolio. Fortunately, there is a cheaper alternative – funds.

Instead of buying individual stocks, investors can buy shares in mutual funds, or exchange-traded funds. In oversimplified terms, these investment vehicles pool the capital of thousands of other investors into a single pot. They then use their combined wealth to invest in a collection of stocks and other securities to generate returns.

This not only puts your investment portfolio on autopilot but also provides instant diversification in a single transaction. There is an annual management fee that can be returned in total. However, staying in a low-cost index fund can make this cost negligible.

Can I pick shares with £500?

A common drawback with funds is that they rarely deliver consistent market-beating returns. By choosing individual UK stocks, investors can unlock more wealth, assuming they can identify winning long-term investments.

However, as mentioned earlier, when trading costs are taken into account, £500 can only be divided into two or three positions. Anything else, and the portfolio needs to do some legwork before breaking even.

For example, let’s say I have to invest £100 in five stocks, and the average trading cost for each transaction is £10. In this case, my portfolio should return about 10% before making a profit. So how should an investor create a diversified portfolio?

There is no rule that says an investment portfolio must be diversified on day one. Suppose the investor knows he will have more capital in the future. In that case, he could invest £500 into a high-quality position today. And in the future, do the same with different stocks, repeating the process until the portfolio reaches a diversified state.

This technique opens the door to more volatility than investing in mutual funds. However, it can potentially yield superior returns in the long run.