What you need to know before you invest in shares
If the idea of buying and selling shares online conjures up images of day traders glued to their screens for eight hours a day, you might need to press the reset button. It’s not about feverishly buying and selling shares in fast-moving stocks in quick succession. Even less is it the testosterone-fuelled world of the 2013 movie “The Wolf of Wall Street”.
The reality of investing in stocks and shares online is that it can be one more way to get your money working hard for you. Alongside the cash savings and fund investments you’re probably already familiar with, shares could be another way to reach your financial goals.
If you are new to share dealing it may seem a bit daunting, but follow a few simple rules and you can find it a lot easier to get started.
- Take your time
Investing in individual shares takes time. First of all, you need to be able to dedicate time to select the companies you invest in, because when you invest in individual shares you become your own fund manager. You also need to give these investments time to really see them thrive. Investing in individual shares can be riskier than investing in a fund. Not only because you make all the choices, but also because all the money you have invested in a stock is reliant on that one company’s fortunes.
You need to bear in mind that businesses often need time to grow and can also face their own ups and downs along the way. They may take time to achieve what they want and for the share price to grow as you wish. You should really aim to hold shares for a minimum of five years, in order to iron out the inevitable ups and downs in the share price and to give your money the best chance to grow. And longer is generally better. Some volatility along the way is to be expected, which is also why you shouldn’t see investing in shares as a short-term activity.
History has shown that shares deliver better returns in the long run than other assets like bonds or cash, though there are no guarantees when it comes to investing, so this may not happen in future.
- Don’t be put off by the lingo
Sometimes it can feel like the world of shares has a language all of its own. Yes, investors who are familiar with PE (price/earnings) ratios and au fait with dividend yield may have a head-start. But not always.
Try “kicking the tyres”. It might sound like yet another bit of investment jargon, but it’s actually the simple process of looking up close at the companies you’re interested in investing in. Some of the shrewdest investors are those who invest in what they know. What you’ve got to remember is that when you buy shares you’re buying a very small piece of that company. If you have a good understanding of the type of business you’re investing in and the prospects for the sector that business operates in, you probably know all you need to know to get started.
As mentioned, when you invest in a company, you’re actually buying a small stake in that business. Its fortunes and failures will help shape your own investment success, while understanding what you’re investing in and why can help you manage the ups and downs that come with stock market investing. It’s also why investing in a number of companies and adding funds and other assets into the mix is the best way to build a diversified investment portfolio.
- Don’t try to time the market
Banish those visions of frenzied day traders, hitting the buy and sell button day in, day out. Investing in shares is a longer-term activity. Yes, in an ideal world you buy when prices are low and sit and watch them rise, but you should resist the urge to tinker. Sell at the wrong time, in the hope of buying some more at a cheaper price, and you could end up kicking yourself if you miss the boat. It’s far better to spend your time doing your homework and investing in a company that you believe in, than trying to second-guess the market and incurring the cost, and potential frustration, of getting it wrong.
Don’t think of investing in shares as a “get rich quick” scheme. If it is thrills and spills you’re after, you’re probably better off taking a bungee jump or going parachuting in your spare time.
- Understand risk
When it comes to any sort of stock market investing you’ll hear risk talked about. A lot.
There’s no such thing as a risk-free investment. Not even cash comes without risk, because over time inflation can eat away at the value of the pound in your pocket. However, it’s more prominent when you invest in stocks and shares because you are immediately exposed to any fluctuation in the share price of the companies you invest in. Aside from individual risks, companies can face sector-specific ones and industrywide ones too.
And don’t forget political and economic factors, which can also affect share price performance. When choosing companies to invest in, you’ll come across all sorts, from industry stalwarts that have stood the test of time, to shiny newcomers that have everything to prove. And some may not last the distance. That’s why you must always do your homework before investing, so you understand exactly what you’re investing in and are comfortable with the risk you are taking with your money.
- Don’t put all your eggs in one basket
For that reason too, it pays to stay diversified. That means keeping a range of assets in your investment portfolio. Ideally across different sectors and geographies too.
Shares should be seen as one part of your overall portfolio. And even then you would be wise to keep your share investments as diverse as possible.
For instance, investing in a restaurant group, a food supplier and even a commercial property company is likely to be better than investing all your money in three restaurant chains operating in the same market. By investing in a number of companies and adding funds and other assets into the mix as well, you’ll be on your way to building a balanced and diversified investment portfolio.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future.
When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets.
This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.