Here’s how a stock market novice could start investing with under £1,000

Christopher Ruane explores some potential pros and cons of investing on a limited budget — and explains how someone could start.

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Image source: Unilever plc

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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.

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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.

Created with Highcharts 11.4.3Unilever PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser Group Plc and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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