There can be many misapprehensions concerning investing in stocks and shares, so it’s important to fully understand the key principles behind trading. It’s easy to get the wrong impression of the stock market – probably not helped by certain racy films and dramatic accounts from those who ‘made a killing’ playing the markets with high stakes.
The reality is somewhat different, and it’s very much a case of taking the long view and keeping emotions in check in order to trade effectively. Some aspects to consider before taking the plunge:
Determine what type of investor you are
There’s a not so subtle difference between being a ‘trader’ and an ‘investor’. If you’re a trader, then your strategy is mainly to buy and sell frequently to make shorter term profits – a steep learning curve for the beginner as you are relying more on ‘gut instinct’.
As a beginner, taking an ‘investor’ approach is likely safer. You build a portfolio steadily and take a longer term view based on the strategy you’ve planned and your investment goals.
A coherent strategy keeps you on track and ensures you’re less likely to be seduced by headline market news. For example, if you saw that the JSE (Johannesburg Stock Exchange) had climbed several percentage points you might impulsively decide to invest. This may not be the best idea as the market could have peaked which is the opposite of basic trading advice; buy when markets are low.
Trading stocks and shares is not a get rich quick scheme. You’ll have heard of traders who made spectacular gains, but the reasons these make news headlines is because they’re just that; news and therefore not an everyday occurrence.
Also, if you hear people talking glowingly of big gains they’ve made then be aware that people mostly talk only of their gains – not necessarily their losses. The old maxim ‘slow and steady wins the race’ very much applies when building a stocks and shares investment portfolio.
Build a varied portfolio
Diversifying – with a range of different types of investments such as stocks, shares and commodities – widens your investment options. Different types of investment product are worth considering. Your attitude to risk and reward will reflect whether you, for example, are more inclined to invest in a vehicle such as a unit trust or a higher risk yet highly flexible CFD (Contracts for Difference) provided by stock market experts such as IG.
As part of your diversification strategy, it’s advisable to have a mix of different types of business within your stock portfolio including steady household names and other stalwarts. A good base to start is perhaps investing in South Africa’s top 20 companies as you’re likely to be familiar with them – but do some basic market research first directly or by subscribing to newsletters and consulting other information sources.
By contrast, there’s no harm in having some stock in growing companies in fast developing industries such as technology, but be aware some of these may make for a bumpy ride in the short term as they grow. Newer companies are often very much investments for the long term and should not be abandoned at the first sign of a mild dip.
The long game
The key takeaway from this is to remember that trading the markets is very much for the long term, and losses and gains are part and parcel of this type of investing. Don’t panic when you experience a few losses and don’t get carried away when some of your trading shows larger gains.