Investing your first £1,000 is an exciting step. But, it’s important you’re armed with the knowledge to understand how and where you can invest those hard-earned pounds.
Figuring out the best way to put your money to work takes some careful thought and research. You also need to do a bit of mental preparation and make sure you’re on top of the rest of your finances.
If you take the proper steps to make sure you know what you’re doing in the stock market, you can give yourself a decent shot at successfully growing your initial £1,000.
Is £1,000 enough to start investing?
Definitely. It’s possible to start with much less if you prefer, you can invest with as little as £2 using a Freetrade investment account.
The bonus of using a larger sum of around £1,000 is that it will give you plenty of options to diversify with stocks and different types of investments.
When it comes to investing, your first steps are important. There’s no single best figure to get started with as you venture into the world of stocks.
If you’ve managed to save £1,000, that’s great. But, if you’re not quite at that level yet, don’t fret. There’s room for everyone in the stock market, no matter how much you’re kicking things off with.
Questions to ask yourself before starting to invest
Whether you’re ready to start investing isn’t down to how much money you’re looking to put into the stock market.
It’s important to make sure you have the right mindset and a realistic idea about your own finances.
The amount you’re able to invest is secondary.
So, to help you get in the right groove to make a sensible decision about whether to invest your £1,000, we’re going to run through some important things to think about first.
Do you have any debt?
This is an important one. For the most part, this doesn’t include things like a mortgage or student loan.
The question refers more to shorter-term, high-interest debt, such as:
- Credit cards
- Payday loans
- Buy now, pay later purchases
- Outstanding money owed on household bills
Reason being, the interest on this debt is often much higher than a realistic return from investing.
So, you’re better off paying down this debt first. Otherwise, the money it’s costing you will negate any returns from the stock market.
Can you afford to lose the money?
Although there are safeguards and regulations within the stock market, there are no guarantees that you’ll make money.
Ideally, it’s best to have roughly three to six months worth of living expenses set aside. This can be your emergency fund, or simply a cushion to give you some more breathing room.
Having this set up before you start investing will reduce the chance you need to dip into your portfolio and sell investments to cover unexpected costs.
Even with the best investing strategy for your £1,000, investments could still gain or lose value, especially in the short term.
There are ways that you can reduce your risk, but it’s still important to understand that your portfolio can go down as well as up.
What is your risk appetite?
You’re the only person who can decide this. Although investing can be a rewarding way to attempt to grow your wealth, there are risks involved.
Some investments are riskier than others. It’s important to remember that you don’t have to choose the riskiest investments to make money in the stock market.
There are plenty of tools you can use to mitigate some of the investment risk. But, only you can determine how much risk you’re willing to accept.
It’s a personal choice that’s unique to you. How comfortable you are with various degrees of risk should then be reflected in your choice of investments.
For how long do you want to invest?
Your time horizon is another crucial factor when it comes to investing decisions.
Everyone’s timeframe will be different. It’s not just about your age either. How long you want to invest for will also come down to your goals for that money.
You should always be thinking about leaving your investments alone for at least five years.
If you don’t plan on touching the money for decades, you can potentially opt for higher-risk investments, in search of better rewards. But, only as long as that sits within your comfortable spectrum of risk.
However, if you’ve got a long time horizon, this doesn’t mean that you have to pick riskier stocks and shares. Your choices should still fit in with your underlying goals.
What are your investment goals?
Think about what you want. Without a destination, it can be difficult to find the right path to take.
Your goals may change over time and you might need to adjust course, and that’s fine.
But when you’re starting out, you need to give yourself some direction. Take some time to consider your goals. They might revolve around:
- Saving for retirement
- Looking to beat inflation
- Investing to become financially independent
- Planning to make a big purchase in the future
- Building wealth for your family
The options are limitless. So, make sure you have an idea about what your ideal investing outcome would look like.
This information will then help you make better decisions and will likely make an impact on your risk appetite and investing time horizon for the £1,000.
Online broker or robo advisor?
Depending on your personality and interest in the stock market, you can choose how involved you want to be.
As a beginner, one of your first decisions will be looking at whether DIY vs robo advisor investing suits you best.
Robo-advisor
If you opt for a robo-advisor, this is a very hands-off approach. You simply pick a plan that suits your style, and then deposit your funds.
The key benefits of a robo-adviser include things like you don’t have to worry about choosing your own investments and that they tend to be matched to your risk profile. You also don’t have to have huge sums of money to start.
The downsides include the opposite. You don’t get a huge amount of control or choice over how and what your portfolio is invested in. Given it’s done for you, robo-advisor platforms also often come with added fees for the automated service.
Online broker
Using an online broker means you’re more involved and have direct control over your portfolio of investments.
You get to hand pick the exact investments to put your £1,000 into.
You’re likely to have lower fees if you use the right kind of platform. And, there are still ways to invest passively by using low-cost ETFs (exchange-traded funds).
The drawback is that it’s up to you to select what investments you want to buy. This added step of responsibility means you should take care when picking what to invest in with your £1,000.
Fees and costs of the investment platform
When it comes to investing, low fees play a vital part in your ability to be successful. It’s important to understand all the costs involved before you jump in.
Some platforms will have significant flat platform fees or will charge them as a percentage of your holdings. This can act as a silent killer when it comes to building wealth.
Certain brokers also charge commissions every time you make a trade.
For example, if your platform has a £10 commission and you want to make 10 investments with your £1,000, this starts you off on the back foot.
The total cost to invest would be £100, meaning that you’re basically already on a negative 10% return. So, you’d then have to make roughly an 11% return just to break even.
Along with commissions being annoying, ongoing fees are a pain too. This is because your fees can compound over time.
So, when a platform advertises an ongoing fee of 0.5%, this doesn’t look too bad at first glance.
But when you dig deeper and run the numbers, this seemingly small percentage can really eat away at your returns and hamper the magic of compounding.
No matter how successful your investment choices, high fees and commissions are going to leave you with an uphill battle from the get-go.
Using a platform with low costs is one area you have direct control over when it comes to investing.
So, don’t squander your £1,000 by filling the pockets of banks and financial companies that have plenty of cash already.
Saving or investing £1,000?
Choosing which path will all depend on the three areas discussed above. So, review your:
- Goals
- Time horizon
- Appetite for risk
Understanding these areas and how they relate to your personal situation will help inform your decisions.
It’s also worth making sure you’re fully informed about the advantages and disadvantages of saving vs investing.
Most people fail to grasp the risks of saving with a return lower than the level of inflation. When this happens, you are guaranteeing that your money is losing value over time.
The benefit of holding cash however, is that it remains relatively stable on a day-to-day basis.
So, although investing has its own risks, it’s important to weigh up the real pros and cons of each. It’s all about finding the right balance.
Invest £1,000 in the stock market or crypto?
This is a question that’s beencropping up more and more over recent years.
In large part, that’s because many people have seen the astronomical returns that some have made over the last decade by investing in certain cryptos.
But, that’s come with plenty of volatility. Multiple coints have crashed at regular intervals, bringing investors looking for a quick return back down to earth again.
While it may have started off as an alternative to pounds and dollars, these days cryptocurrency is a speculative investment into new technology. One that doesn’t have huge amounts practical use or real-world application currently.
Stocks, on the other hand, allow you to own pieces of companies that are adding value to the world and more importantly, making money. This makes it much more straightforward to determine what a stock is worth. To learn more about this process, take a look at our guide on how to value stocks.
If you’re dead set on cryptocurrency investing, one alternative is to find stock market investments related to the space.
This could involve investing in a publicly listed cryptocurrency exchange, a crypto mining firm, or even a stock that holds crypto on its balance sheet. Our guide on investing in crypto stocks digs into this.
A good analogy to remember relates to the gold rush. Do you want to be the one digging for gold, or the person selling the shovels?
Investing in the stock market
Using the right platform, you can now have access to a huge multitude of investments right at your fingertips.
This straightforward access to stock markets creates plenty of opportunities to find investments to suit your needs.
Investing for the long term
As mentioned, a long-term mindset is key when it comes to investing your money.
Investing for the long run is one of the best ways to make sensible decisions with your £1,000. Having a decent runway of many years gives your investments time to mature, allowing you to ride out the volatility that often comes with investing.
Investments don’t tend to grow in a straight line and returns are never guaranteed. If you build a portfolio built for the long-term you do give yourself a better chance at success.
This is just an example, but here’s what your £1,000 investment could look like when aiming for 5% growth each year over different time frames:
Past performance is not a reliable indicator of future returns.
Where can you invest £1,000 in the stock market?
The possibilities are endless. Well, not quite infinite, but there are definitely heaps of ways you can put your £1,000 to work in the stock market.
Here are a few different ideas to get your creative investment juices flowing.
US stocks
There are definitely plenty of opportunities available across the pond.
It’s not just flashy tech stocks either, the US has plenty of compelling investments for you to consider with your £1,000.
America has been the world’s economic powerhouse over the last century. And, among all the events and turbulence, the US markets have come out on top.
The US remains a global hub of innovation, boasting a robust economy and a highly educated labour force. Having the dollar as the world reserve currency also helps with investor confidence in the region.
If you’d like to know a bit more about buying American, check out our guide on how to buy US shares in the UK.
UK stocks
Although some UK shares haven’t been fashionable or trendy over the past few years, especially among the large cap financial and mining names, there is still a huge array of captivating investments right on your doorstep.
The great thing about investing your £1,000 in UK stocks is that most are ISA compatible.
This can be one of the best ways to make your investments tax efficient and make sure you get to keep more of your investment returns.
A particular strength of some of the biggest UK stocks is the strong commitment to dividends.
Income from UK shares in the form of dividends is what makes a number of investments particularly attractive.
But, the UK is no one-trick pony. Dig a little deeper and you’ll find plenty of innovative ways to build wealth in British shares.
ETFs
If you’re not a fan of picking out individual stocks, there’s also the option to invest your £1,000 into broad ETFs covering major parts of the US and UK stock markets.
There are also global ETFs covering the whole world, or smaller investing niches. On the Freetrade app you can find ETFs that invest in:
- Stocks and shares
- Bonds
- Commodities
- Emerging markets
Choosing to invest in ETFs can be a useful way to get exposure to a whole basket of investments at a low cost.
It also provides a certain level of diversity for your thousand pound investment. This is partly why ETFs are often considered one of the best investments for beginners.
However, ETFs don’t automatically come with a perfect dose of diversity. Most will concentrate on a specific sector or country, which can still leave you over-exposed to a particular region or industry. So, it’s still important to consider using them as part of a well-diversified portfolio.
Dividend stocks
Looking for regular dividend payments can be a valuable way to attempt to build your portfolio with steady growth.
Even if dividend stocks don’t grow in value, you can reinvest the income paid to benefit from compound interest.
On the Freetrade app, you can even buy fractional shares in US companies that will then pay out a fractional dividend in proportion to how much of the share you own.
Of course, dividend stocks can go down as well as up in terms of share price. And, it’s important to keep in mind that dividend payments aren’t guaranteed.
However, there are plenty of investments out there that have a strong track record of rewarding investors with consistent income.
Alongside individual stocks, there are also ETFs and investment trusts that focus on dividend payments.
How to invest £1000 with minimum risk
Unfortunately, there’s no way to completely remove the element of risk whichever way you choose to invest your £1,000. Firms can fail, it’s the nature of the stock market beast.
But there are steps you can take to reduce the level of risk you take on board. Here are a few ways you can limit how much risk is involved.
Invest for the long term. Growth doesn’t tend to happen in a linear fashion, so there can be short-term volatility. A longer time frame can give your investments a better chance to grow and iron out short-term kinks along the way.
Have a look at management teams with a strong track record. Past performance doesn’t dictate future results, but it does give you an idea about how company bosses think and react to bumps in the road.
Do they tend to make sensible judgement calls? Do they waste money or put it to good use? The past few years could show you who walks the walk and who has clearly just talked a good game.
Keep your costs low. Paying high fees and commissions starts you off on a negative footing, minimising this provides a much better launchpad for your £1,000.
It’s also important to realise that there are risks involved if you just keep your £1,000 in cash. With inflation at high levels, this guarantees that your money is losing value.
If inflation is 9%, this means you’ve lost that in purchasing power. So, your thousand pounds would only be able to buy you the equivalent of £910 worth of goods after a year.
Investing during inflation will at least give you a fighting chance of keeping up with those cost pressures.
Invest £1,000 in a stocks and shares ISA
We touched on this earlier, but making the most of your ISA allowance is another tool you have in your shed.
Holding your investments in a stocks and shares ISA means making your returns tax efficient both as your portfolio grows, and when you want to start withdrawing your money.
You have a £20,000 ISA allowance for the current tax year. That means you could invest your £1,000 in a range of investments inside your stocks and shares ISA and won’t have to pay capital gains tax (CGT) or dividend income tax on any growth you achieve.
Invest £1,000 in a SIPP pension
Making the most of your pension allowance is another way of potentially boosting your returns.
Using your SIPP (self-invested personal pension) is one of the best long-term options because you get immediate tax relief on any money you put in.
This relief means you get an automatic top-up from the government of 20-25%, depending on which tax bracket your personal level of income falls into.
So, if you put your £1,000 into a SIPP pension, you’d get an immediate boost, bringing your portfolio to at least £1,250 before you even make an investment.
You don’t have to just stop at £1,000 either. Each tax year you can put in up to 100% of your annual income or £40,000 (whichever is lower). You can add more, you just won’t get the same level of tax relief on any contributions above this level.
For both ISAs and SIPPs its important to keep in mind that the rules can change from year to year and any benefits depend on your personal circumastances.
How much can you get if you invest £1,000 monthly?
Although a £1,000 lump sum is a great place to start, regular monthly investing is when your compounding returns can really take off.
To give you some visual stimulus to work with, we’ll go back to our earlier example, but with a twist.
Here’s what your portfolio could look like with a 5% return if you kept investing £1,000 each month:
Past performance is not a reliable indicator of future returns.
💡 Remember, this 5% return isn’t a guarantee. It’s just an illustration to show you what the possibilities are when you invest a decent sum on a regular basis.
How much do you have to invest to make £1,000 a month?
This would depend on the return your chosen investments provide.
A £1,000 monthly return would work out as £12,000 per year. So, if you owned a dividend stock with a 5% yield and monthly distributions, you’d need to have £240,000 invested to generate £1,000 a month. Keep in mind though that stocks move so the natural income you receive will vary too.
Similarly, if you owned other types of investments or stocks, how much you’d need to invest to make £1,000 a month would depend on your returns.
You also have to factor in any tax implications if you’re not holding your investments in a stocks and shares ISA or SIPP.
As it stands, you have to pay tax on any annual dividend income over £2,000, and on any capital gains over £12,300.
Using an ISA simplifies your tax position. It removes the barrier of a tax burden from the equation when you’re hoping to eventually generate £1,000 a month from your investment portfolio.
Most popular stocks on Freetrade
To give you some investing inspiration, here’s a rundown of the most popular stocks and shares on Freetrade from 2021. Just because these were the most-bought investments doesn’t necessarily make them the best way to invest your £1,000.
The most traded shares on Freetrade will change over time, but this will give you an idea about how other UK investors are investing.
At Freetrade, we think investing should be open to everyone. It shouldn’t be complicated, and it shouldn’t cost the earth. Our investment app makes buying and selling shares simple for beginners and experienced investors and keeps costs low. So download the app and start investing today. Choose from a general investment account and a tax-efficient stocks and shares ISA or SIPP account.
