So you’ve decided to invest in the stock market, but you can’t even imagine where to start. Look no further. Here you’ll find a foundational guide — albeit basic — of how to get your head around the stock market. We’ll look at exactly what is involved in buying shares, selling shares and, of course, the risks you should be aware of in the market.
The most valuable piece of advice I’ve heard is:
‘Only invest what you’re willing to lose.’
The outcome is never certain when investing. There is absolutely no promise of a win, no matter how successful the company you’re investing in is. This is part and parcel of why investing can be so lucrative — because the risk is so substantial.
Please remember what you’re about to read is for a general audience and does not take into consideration your individual circumstances. If in doubt, you should speak to a financial advisor.
Also, always remember that successful investors understand their investments. Study the company, the market, the industry the company is in and the surrounding risks before chancing your wealth.
A fundamental point to remember when buying shares is the importance of the name of the company. The stocks or shares that you are buying are a share of the respective company or business. You shouldn’t buy a share in a business unless you’re an avid believer in it.
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Before we get into how to actually purchase shares, it’s vital to recognise when to buy. This way you can ensure you are giving yourself the best chance at a lucrative investment.
One common approach is to try to buy shares when the company is displaying an upward trend. However, the key here is to get in while the trend is still in an early stage. Or better yet, even before it kicks off. This is easier said than done. Therefore it’s important to engage with the news about the company you’re interested in buying shares of. Or better yet, engage with the news for the entire sector, market, or industry, as well as the company’s specific movements.
Please remember this is purely educational information and should not be taken as direct advice. You must do your own research and consider your own personal circumstances prior to investing.
Buying shares in Australia from companies listed on the Australia Securities Exchange (ASX) shouldn’t be too complicated after you find yourself a stockbroker. There are many stockbrokers competing for investors in Australia, so this part of the process should be easy.
After you make an account to invest with, you can simply call your broker to arrange which shares you’d like to buy and how many of them — by law your broker is obliged to get you the best price possible. You can communicate with you broker by telephone or internet, keeping in mind that internet communication is often easier and cheaper.
Please remember the minimum amount needed to invest in an ASX-listed company is $500. And this does not include further fees such as paying your broker commission.
You can sell your shares when you’ve decided that an investment is no longer a good opportunity. This usually happens when a company’s share value is in a downward trend, or if there is a wealth of information in the news that suggests the company is in turmoil. Often, as will be explained below, investors use a stop-loss order which notifies yourself or your broker when a share has lost a pre-determined amount of value. This identifies that the share is now a poor opportunity that should be sold to prevent further losses.
Knowing when to sell is vital for when a stock is performing poorly. The timing of this transaction could determine how much money you lose.
The process of selling shares is much the same as buying, but in reverse. However, instead of trying to find the lowest price to buy in at, you’re looking for the highest possible price to offload your unwanted shares for.
Please remember that you should not sell shares if a company is displaying positive share growth, and/or if the industry is booming. At this time it is best to hold your shares, and watch the profits roll in.
Risks When Investing in Shares
The risks that are associated with investing are vast and multi-faceted; however, with the right strategy, minimising your risks is achievable. And could be the difference between whether you walk away as a richer or poorer investor. Below are three methods for reducing/managing your risks, taken from Port Phillip Publishing’s Investor Starter Guide.
Risk Management Method One: Do Your Own Research
It is extremely important to do your own research on an investment before you purchase their shares. There are vast amounts of information out there that will tell you when it’s a good time to buy or sell shares. However, often this opinion does not take into consideration your own circumstances or may have been written with an ulterior motive. Therefore prior to investing in any business, you must conduct your own research, so you can understand exactly why you’ve made the investment decision — and better your chances of making a smart investment! This also works to cement your own personal knowledge on an opinion/trend you’re not 100% sure about.
Remember that while it’s fine to take advice from sources which may have more knowledge than you on the company/industry, no one has more interest in growing your wealth than you — especially if that wealth is threatened.
Risk Management Method Two: Determine Exactly How Much Money You Should Invest
Another important method for managing risks and reducing personal losses is to individually determine exactly how much money you can afford to lose/invest in a business. When investing you should never assume that the money you put in will come back to you as a larger amount, or any amount at all. You should assume the money is lost forever, and if it comes back to you, then that’s wonderful, and if it doesn’t, then you were prepared for it.
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Another way to manage exactly how much money you should invest is by never investing more than 5% of your portfolio on a single share. This may not seem like it’s always the best way to go, especially if you can recognise an investment with particularly good potential; however, it is essential in limiting your potential losses — and can actually help stretch your capital further. For example, if you were to put 25% of your portfolio on a single company, then you would only have 75% left (or three other investing opportunities if you invested equal parts of your portfolio) to spend on other companies, should that company not perform according to plan. If you only ever put 5% into a business, then you have more room to move in the rest of your portfolio (another 19 potential investments following the equal parts system) should that investment be a letdown. This is a simple way of ensuring you never put too much money in one position, and should there be a loss, your loss is more manageable (and less devastating).
Risk Management Method Three: Use a Stop-Loss and Stick with It
A way in which you could further reduce the risks associated with investing is to set yourself a stop-loss order.
A stop-loss order could be given to yourself or to your broker in an effort to minimise the amount of money you lose — should a company’s shares start to fall with only bad news in tow. Stop-loss orders are useful for notifying whomever necessary when a stock isn’t performing as expected. They can be sold on to ensure further losses are not incurred.
A good rule of thumb is to sell when your investment has lost 25% of its value. For example, if you purchased shares for $4.00 apiece, then you should set a stop-loss at $3.00. Then you are protected for most of your investment and can only ever lose 25% of the initial money you have put in. However, please keep in mind that in a declining market many may have a similar stop-loss order, and selling your position at your exact stop-loss level may not be possible. But having one in place is far safer than monitoring the volatile markets yourself.