Does it take thousands of pounds to start investing in the stock market? No. In fact, it does not even take one thousand pounds.
Here is how someone who had not bought shares before could start investing with less this month.
Principles of good investment
Although it is possible to start investing with a few hundred pounds, that does not mean it is a good idea to plunge headlong into the stock market without understanding it.
In fact, that strikes me as a very bad idea – and a likely way to lose money. The point of investing is the opposite, trying to build not destroy wealth.
So I think it makes sense for the would-be investor to learn about how the stock market works and also some principles of good investing, like diversifying across different shares.
Setting up a share-dealing account
It would also be necessary to set up a way to invest, such as share-dealing account or Stocks and Shares ISA. With lots of different options, it is worth spending time to make the best choice for individual circumstances.
There can be a lag between starting this process and having cash put into the account available to invest, so it seems smart to do this even before choosing particular shares to buy.
How to invest on a limited budget
Having less than £1,000 to invest does mean that any beginner’s mistakes would hopefully be less costly than with £1k at stake.
But there are less attractive practical implications too. One is the potential for minimum fees to eat up a proportionately bigger amount of an ISA than if it had a larger sum (one reason why spending time finding the right ISA can be a good investment in itself).
Another is diversification. It is harder to spread, say, £800 across a range of shares than investing a larger amount. It is still possible though, and diversification is a sensible risk-reduction strategy for investors at all levels.
Erring towards simplicity, not complication
When people start investing they can make the mistake of trying to find little-known companies in the hope they become huge. I say “mistake” because, although that strategy can sometimes work, it can also be an abysmal failure.
My own approach is to start with a product I understand, like soap powder, and then look for a business that has a sustainable competitive advantage in that field. Unilever (LSE: ULVR) is an example, thanks to its strong portfolio of premium brands and proprietary technology (another is Reckitt).
I then consider the company’s balance sheet to see how healthy its debt position is. I also consider risks. Based on all this, I make a judgment about whether I would like to own a stake in the company.
If so, I decide what I think is a reasonable price and if the share costs more, it will go on my watchlist but not my shopping list.
While I like Unilever, its price-to-earnings ratio of 20 is higher than I would like, given risks such as ongoing uncertainty about whether spinning off its ice cream division will create or destroy value.
So I have no plans to buy the share. But the reason why illustrates my thought process when investing.
This post was originally published on Motley Fool
