investing in shares

Seven tips for investing in shares

11 Sep, 2017

The share market is undergoing some volatility at the moment, but that doesn’t mean it’s a bad time to invest in shares. In fact, it could be the perfect time to find cheap stocks.

If you’re new to investing in shares or are lacking the confidence to build your portfolio, here are some tips to start you off.

 

1. Prepare and educate yourself

Very few people wing it in the stock market and come out on top. So before you embark on this journey, it’s worth reading up on what you’re getting into and understanding how the share market works.

Hundreds of books have been writing on the topic of investing in shares, but one of the best is now over 60 years old. The Intelligent Investor by Benjamin Graham contains some excellent advice that has stood the test of time. Chapters 8 and 20 are particularly relevant to investing in shares.

 

2. Be sensible

Don’t lose sight of your short- to medium-term financial plans. Only invest in shares if you’re prepared for the money to be tied up for at least five years – preferably ten. If you know you’ll need to access the money before then, forget share investments for now and instead open a high-interest savings account.

A couple more pieces of housekeeping: pay off any credit card debt and save cash equivalent to around six months’ living expenses – just in case.

 

3. Set up a brokerage account online

All your buying and selling can be managed through an online system. Take the time to research fees and find a low-cost broker. They may charge a fixed rate of $10-20 per trade, or a percentage of larger amounts.

You don’t have to invest thousands of dollars when you first start out. Even $500 will be enough to wet your appetite and give you a feel for how trading works, although you may not get a huge return after fees.

Be prepared to hold onto stock for a while since the less you trade, the less you’ll have to pay in fees.

 

4. Seek high-quality companies at a good price

A solid strategy is to buy shares in high-quality businesses which will appreciate over time. But the key is to purchase when they are trading below their real value, so you have a safety margin.

Don’t invest in businesses you don’t understand. Could you explain to a 10-year-old how the business makes money and what it sells? If not, steer clear.

Also avoid getting caught up in media hype about a particular business or industry. This only serves to drive share prices up, increasing the chances you’ll overpay.

 

5. Limit orders and use dollar cost averaging for big buys

When you buy shares, the ‘limit’ option allows you to state the maximum price you will pay per share. This gives you more control than the ‘at market’ option, which tells your broker to buy at the best available price, however high that may be.

You also have the option of ‘dollar cost averaging’, which lets you buy a fixed value of a particular share on a regular basis, building up your holding over time. This is a good option if you’re investing $5,000 or more.

 

6. Maintain a diverse portfolio

One of the golden rules of investment is “don’t put all your eggs in one basket”. This means owning shares in a range of industries and even countries. 10-20 diverse stocks should be enough to manage risk, and the majority of these should be with companies you consider safe.

When you start out, of course, it’s impossible to properly diversify unless you invest in an index or mutual fund.

 

7. Don’t rush to buy or sell

You might be keen to get started investing in shares but you should exercise some patience in waiting for the right opportunity. Remember, you’re after a high-quality but undervalued company that you understand and are willing to invest in for at least five years.

Patience is also required when it comes to holding shares. Volatility and stagnation in the market can both be a cause of frustration, but research shows that share holders who trade frequently are likely to make less profit than those who hold onto shares for longer.

Just because your stocks fall in value, it doesn’t mean you should sell in panic. Australian shares have yielded an average annual return of 11.5% over the past 90 years. They have outperformed any other asset class, weathering the storms of recessions, financial crises and global wars.

As a rule of thumb you should sell a stock when:

  • It’s making up too high a percentage of your portfolio;
  • You’re not confident assessing the business’s potential for the future; or
  • An even better option has come along to replace it.

So do your research, start small, take your time, and who knows where the Australian stock market may take you.

 

In summary:

  • Before investing in shares, take the time to educate yourself and research the market.
  • Make sure you’re not putting all your money into shares; save a six-month emergency fund and only invest as much as you can afford to tie up for five to ten years.
  • Aim to trade infrequently to minimise fees. Find an online broker that charges reasonable rates, and make use of the different trading options that suit you.
  • Look for high-quality companies that are undervalued, and only invest in businesses you understand.
  • Keep your share portfolio diverse to avoid risks.
  • Be patient when buying and selling to maximise potential profit.
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