The Basics of Investing
Investments are not a game of chance; the same applies to many other areas of life. When looking to invest, information is half the battle won. Anyone who invests money should know in advance precisely what things are essential. This requires a certain amount of specialist knowledge, and newcomers should familiarise themselves with the basics of investing.
Here are five of them for those interested in the stock market:
Inform yourself thoroughly in advance.
Investors can learn financial knowledge through specialist media, stock market seminars, and training programs. This way, valuable stock market knowledge can be acquired, such as how stock market trading works, asset classes, and financial products are available. When it comes to investing it is also a matter of lifelong learning. Anyone who knows the essential workings of markets and financial products has no choice but to stay informed about the latest news before investing capital. An investor who wants to invest in the shares of an automotive company, for example, should take a closer look at the current general economic situation surrounding the industry and the business of the company in question. After all, the success of equity investments depends on how profitable the companies in question will be in the future. Because - and this is also part of the basic knowledge of the stock market: Shareholders are company shareholders. Investors can profit from this through dividends and share price increases if the company makes a profit.
Do not put all your eggs in one basket.
The fundamental goal of investing is clear: to make as high a profit as possible and suffer as few losses as possible. However, investors should put only some of their eggs in one basket. Time and time again, there are tragic examples of investors specialising in just one stock or just a few stocks in a particular sector. A well-known example in South Africa is Steinhoff International Holdings N.V., which was a darling amongst fund manager portfolios and even for stock market newcomers. After news surfaced around accounting irregularities at the firm, the shares plummeted by 95% erasing billions of Rands in shareholder value. It wasn't only Steinhoff that was to blame, but the investors themselves. Had they not focused on just one stock and instead invested in many shares from several countries and sectors, they would have fared better. It would have been even better if they had also invested in other asset classes, such as bonds and real estate, i.e., diversified their portfolio. The principle is simple: If one asset class loses value, different asset classes could compensate for the loss or reduce it. One asset should develop itself as independently as possible from the other asset classes. This is the case, for example, with equities and bonds.
Investors often ask themselves what percentage of their capital they should invest in equities. In principle, equities are more volatile than bonds, but they also offer higher potential returns. At the same time, the greater range of fluctuation also means that the risk is higher. How high the ratio should also depend, above all, on the investor's willingness to take risks. The higher the equity ratio, the more offensive the investment. In the end, everyone must decide this for themselves. In addition, there is a rule of thumb: 100 minus age. Accordingly, a 30-year-old would invest 70 percent of his capital in stocks. A 60-year-old, on the other hand, would invest only 40 percent. The idea behind this is that with increasing age, the share quota decreases because one has less time to succeed with the volatile asset class of shares. If you have more time, you can invest your money for a longer and better ride-out price dips in equities. For example, it would be tragic for a retiree if his assets suddenly lost a large part of their value due to price dips. For this reason, older people are advised to switch their portfolios from equities to less volatile assets at an early stage.
Only Invest Available Capital
If you invest money in the financial markets, you should only invest with freely available capital. In other words, money that you do not need to finance your life. An investor who wants to buy a new car in two years should put aside the money already available for this purpose, for example, in a savings or call money account. If he were to invest it in shares instead to finance the car later from the proceeds of the share sales, something else might be needed. Namely, if the prices go down and he ends up with less money than before the investment. Investors can determine their liquidity status by calculating all fixed monthly costs and expenses in advance.
Patience is required when investing money
Investors must be convinced of their investment decision. Of course, their (market) expectations may not be fulfilled, and the returns fail to materialise. Then it is a matter of selling the position or continuing to hold it. When making this decision, investors should make it clear in advance that what loss exceeds the pain threshold. In this case, you know exactly when you should part with your investment. However, many investors make the mistake of quickly panicking and pressing the “sell button" when their investment performance is unfavourable to them. Example of equity investment: The investor uses index funds to focus on leading indices of developed regions such as the USA, Europe, and Japan. The following year, the global economic crisis and the stock indices collapsed. The investor is disappointed and leaves the stock business with a significant loss. However, experience has shown that major stock markets perform positively over the long term - ten years or more. If one assumes that companies in large economies will in the future do what they were created to do - namely, generate profits - one should be patient and remain invested. This way, investors can ride out periods of crisis and get into the black in the long run.
Remain sceptical about stock tips
How often do you read, hear and see something about so-called price rockets and shares in which you have to invest now to participate in high, if not excessive, profits? At the latest then, investors should become suspicious. Why should someone reveal their "ultimate" stock tip? If the recommended shares were so profitable, they could invest their own money and cash in on it. It is better to form your own opinion about a company or a share. For example, you should ask yourself: Does the stock have price potential, and why? Does the company in question have a promising business model? When looking for promising stocks, it makes sense to look at well-founded reports and assessments by established stock market experts or media. For example, specialist editorial departments, analysts, and stock market professionals usually have a better and deeper insight than you. Nevertheless, investors must weigh the possible advantages and disadvantages of investment and assess the chances of making a profit with this or that share.
A guideline for Investors:
- The investor is himself. It is only possible by acquiring specific specialist knowledge.
- It is always advantageous to spreadone's capital across different stocks, regions, and industries. In this way, investors spread the risk over several shoulders.
- You should invest only the money you do not need for everyday life.
- Sensible investors should keep a cool head in the face of declines in value and take a strategic approach to their investments.
of stock market information and inform yourself, but judge whether the stock investment makes sense.