Here’s how a stock market novice can start investing for under £1,000

Does it take thousands of pounds to start investing in the stock market? No. In fact, it doesn’t even take one thousands of pounds.

Here is how someone who has never bought shares before can start investing with a small amount of money this month.

Good investment principles

Although you may have started investing with a few hundred pounds, that doesn’t mean it’s a good idea to jump into the stock market without understanding it.

Frankly, that strikes me as a very bad idea – and a likely way to lose money. The point of investing is the opposite, to try to build not destroy wealth.

So I think it makes sense for a would-be investor to learn how the stock market works and some good investment principles, like diversifying stocks.

Setting up a sharing account

It will also be necessary to set up an investment vehicle, such as a shares trading account or a Stocks and Shares ISA. With so many different options, it’s worth spending time making the best choice for each situation.

There may be a delay between starting this process and having the funds deposited into the account available for investment, so it seems wise to do this even before selecting specific stocks to buy.

How to invest on a limited budget

Having less than £1,000 to invest means that any mistakes you make will hopefully cost less than £1k at risk.

But there are less attractive consequences as well. Another is the ability of small fees to consume a proportionately larger amount of an ISA than with a larger sum (one reason why spending time finding the right ISA can be a good investment in itself).

Another variation. It is more difficult to spread, say, £800 across a range of shares than to invest a large amount. It’s still possible, and diversification is a sensible risk reduction strategy for investors at all levels.

It’s a mistake towards simplicity, not a problem

When people start investing they can make the mistake of trying to find unknown companies in the hope that they will become big. i say “error” because, although this strategy can sometimes work, it can also be a huge failure.

My approach is to start with a product that I understand, such as soap powder, and then look for a business that has a sustainable competitive advantage in that industry. Unilever (LSE: ULVR) for example, thanks to its strong portfolio of premium products and proprietary technologies (ex Reckitt).

Then I examine the company’s balance sheet to see how healthy its credit situation is. I also consider the risks. Based on all this, I made a decision about whether I would like to own a share in the company.

If so, I decide what I think is a fair price and if the share is worth more, it will go on my watch list but not my buy list.

While I like Unilever, its price-to-earnings ratio of 20 is higher than I’d like, given risks such as continued uncertainty about whether spinning off its ice cream division will create or destroy value.

So I have no plans to buy the share. But reason reflects my thought process when investing.