The protesters, some wearing Anonymous masks and holding up a large banner reading "Real Democracy Now", gathered on the eve of a trade union march expected to draw tens of thousands.
They were watched by about 25 police officers.
"We are here in front of Westminster to say we want real democracy, and we want it now," said activist John Sinha, one of the organisers, as he addressed the crowd.
Ilana Taylor, 18, who works in an environmental group, said: "Democracy is totally being eroded. It's becoming more and more profits before people."
"They're taking away too much of people's liberties," he said.
The demonstrators said they planned to stay on the square for nine days, but police told them they were not allowed to have sleeping bags or tents on the square.
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