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The idea of investing in the stock market may seem complicated and expensive. However, the reality is that it is possible to start buying stocks with a limited amount of money.
In fact, I believe that even with £100 it is possible to make a move into the stock market.
Setting up a way to invest
The first step might be to establish a practical way to invest. This could be a stocks and Shares ISA or a shares trading account, for example.
There are many options here and fortunately, not all of them are aimed at people investing large sums of money. So by doing some research and considering my own financial circumstances and goals, my goal is to find the one that's right for me.
Just because an investor starts with £100 doesn't mean that's all they end up investing. By setting aside £100 each month, for example, in a given year, that would be equivalent to having £1,200 to invest.
Get familiar with how the stock market works
But before investing it is necessary to understand at least some of the main points about how the stock market works.
Many people think that by investing in a brilliant company they could make money. Unfortunately, that's not necessarily true.
It is important to understand, for example, whether the brilliant company also has brilliant financials that are likely to remain so. For example, is your business model sustainable in the context of competition and how much debt (or cash) do you have on your balance sheet?
Another important consideration is valuation. Even if it's a great business, paying too much for its shares could end up being a bad financial decision.
Putting theory into practice.
As an example, consider computing center (LSE: CCC). I think it is a well-run, proven business with an attractive business model.
But let's imagine that an investor had entered Computacenter a quarter of a century ago, just before the dot-com bubble burst. They would have had to wait 20 years for the stock to return to its 2000 price!
In recent years, the business has benefited from strong customer spending. It is now trading at a P/E ratio of 14, which seems reasonable to me.
As in 2000, one risk is a slowdown in IT spending by large corporate clients. That alone is dissuading me from purchasing Computacenter stock for my portfolio in the current climate of economic uncertainty. For now, however, business seems to be going well. But that was true in the early 2000s.
That example illustrates why smart investors always pay attention to valuation when investing. But it also points to some of the other factors beyond valuation that I weigh when deciding whether to start buying shares of a company.
These range from how large the customer market is to how sustainable the competitive advantage a company has.
I believe there are great stocks available at attractive prices in today's market, but finding them can take effort and a lot of research.
