I believe learning to invest in shares is a worthwhile endeavour for anyone. For Australians, picking a share from the All Ordinaries (INDEXASX: XAO) index is a good place to start. There is risk attached to buying shares in publicly traded companies. There is also potential for returns well in excess of bank interest. Additionally, a small initial investment offers the opportunity to learn without too much at stake.
The upside of investing
The returns generated from investing in a share from the All Ords can be significant. As an example, 10 years ago REA Group Limited (ASX: REA) shares traded as low as $5.24 per share. Today, REA shares are trading at a price of $97.52 per share (at time of writing). That means an investment of $1,000 10 years ago would now be worth more than $18,000.
What to look for in your first share
When picking your first share, I suggest finding a company that is easy for you to understand. This will enhance the learning experience by making company announcements and their impact on the share price easier to follow. Picking a company which you believe has a bright future would also make sense.
Buying shares in a company that is financially sound is also smart. This can be a reflection of a good business model and/or sound management. Common metrics which indicate a financially strong company are low debt relative to equity, positive cash flow and high return on equity.
Price is another key element when making a share purchase. Even as a beginner, attempting to calculate what is a reasonable price to pay for a share is a valuable exercise. Paying a price well above true value can make it difficult to generate high returns over the long run.
Companies worth considering
Some companies which I believe are currently worthwhile considering as a first investment include Lendlease Group (ASX: LLC), Reliance Worldwide Corporation Ltd (ASX: RWC) and Westpac Banking Corp (ASX: WBC). I consider these companies to be reasonably priced and to have a strong long-term outlook.
Buying a share trading on the ASX has the potential to generate significant returns for the investor. There are many elements that should be considered when making a share purchase, one of which is price. As a new investor, a small investment can also be beneficial from a learning perspective. Regardless of returns generated initially, this process could lead to greater wealth creation possibilities into the future.
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Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended REA Group Limited and Reliance Worldwide Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.