How To Invest in Stocks – A Quick Guide
Investing is one way you can earn additional financial returns beyond savings and property. But ‘investing,’ observed one famed investor, ‘is simple, but not easy.’
Below are eight pointers to help you ease your way into the stock market. This is only a starting guide.
Investing in the stock market is volatile
People always underestimate the volatility of share prices. Prices can halve or double in a few short weeks. In 1987, prices collapsed one-fifth on one windy day. Always factor this in when investing in stock markets.
Forecasting stock markets is very difficult
Big swings in stock prices means very few can forecast stock prices accurately, day in day out. Since you can not control what the market will do, better do something more productive and on things you can control, such as risk management.
Focus on risk management when investing in stocks
This is to make sure that your portfolio does not blow up after six months. Some general guidelines:
- Diversify – Invest in different stocks in different sectors. Owning five different stocks in the same sector does not count.
- Owning other asset classes – Equity investing should only be a part of your portfolio. Consider gold and bonds too.
- Use stop losses – To control losses in case investments turn sour.
- Position sizing – Divide your total equity into, say, 20, units. Do not exceed 2-3 units in any single investment.
- Plan – Have a decent plan on which how you decide to invest your hard-earn capital.
Having these risk management guidelines in place does not mean your equity risk have been eliminated. It merely reduces some of the risk. The trick is: Any plan is better than none at all.
Know what you know about how to invest in stocks
Are you an expert in any sector, such as oil & gas, technology, medical equipment, construction etc? Leverage your knowledge into the stock market by buying into stocks within your knowledge circle. Understanding the key players, their strengths, and new trends in the sector before everyone else. This forms the basis of your ‘edge’. If you don’t understand how a firm earns its profits, stay away.
Hold long-term and reinvest dividends
You have to let the market do the work for you. Churning and trading only add to the trading costs, which make earning profits much harder. So aim to buy for the long term. If your investments produce dividends every year – dividends are cash earned by the company and distributed to shareholders – you can invest them back into the market (see How Warren does it). This increases the size of your equity investment. Consider regular investment too.
Be tax efficient
Always use up your Individual Savings Account (ISA) stock account first. This is £20,000 per year which you can earn tax free (gov link).
Consider Exchange Traded Funds (ETFs)
If you think you don’t have time or expertise to pick stocks yourself. Many investors choose this route because of the simplicity and low cost. Buying into the FTSE 100 Index could be a start. There is an ETF for this, called iShares FTSE 100 (ISF, see below). See some of our guides on ETFs.
Alternatively, you can invest in Investment Trusts (our guide here).
Start as early as possible
Put your money to work and employ the magic of compounding. Set up an ISA stock account to put regular investments into the stock market. The trick is to get started as early as possible and learn as much as you can.
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