Image source: Unilever plc
Do you need thousands of pounds to start investing in the stock market? No. In fact, it's not even necessary. one thousand pounds.
Here's how someone who hadn't bought stocks before could start investing with less this month.
Principles of a good investment
Although it is possible to start investing with a few hundred pounds, that doesn't mean it's a good idea to jump headlong into the stock market without understanding it.
In fact, it seems like a very bad idea to me and a likely way to lose money. The objective of investing is the opposite, trying to build and not destroy wealth.
That's why I think it makes sense for the potential investor to learn how the stock market works and also some principles of good investing, such as diversification between different stocks.
Set up a stock trading account
You would also need to set up a way to invest, such as a shares trading account or stocks and Shares ISA. With so many different options, it is worth taking the time to make the best decision for individual circumstances.
There may be a lag between the start of this process and the cash entering the account available for investing, so it seems smart to do it before you even choose particular stocks to buy.
How to invest on a limited budget
Having less than £1,000 to invest means that any beginner's mistakes would hopefully be less costly than with £1,000 on the line.
But there are also less attractive practical implications. One is the possibility that minimum fees will eat up a proportionately larger amount of an ISA than if you had a larger sum (one of the reasons why taking the time to find the right ISA can be a good investment in itself).
Another is diversification. It is harder to spread, say, £800 across a range of stocks than it is to invest a larger amount. However, it is still possible and diversification is a sensible risk reduction strategy for investors of all levels.
Err towards simplicity, not complication
When people start investing, they can make the mistake of trying to find little-known companies in the hopes that they will become big. I say “mistakebecause, 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 one 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 the risks. Based on all this, I decide if I would like to have a stake in the company.
If so, I decide what I think is a reasonable price and if the stock costs more, it will go on my watch list but not my buy list.
While I like Unilever, its P/E ratio of 20 is higher than I would like, given risks such as continued uncertainty over whether the spinoff of its ice cream division will create or destroy value.
So I have no plans to buy the stock. But the reason illustrates my thought process when investing.
