The individual investor should act consistently as an investor and not as a speculator.Ben Graham
As I mentioned in a previous post, my introduction to the world of share ownership was a rocky one. Over time, I have had many good calls, but also enough bad ones to keep me from thinking i’m Hackney’s answer to Warren Buffett.
But, I have learned a few things that I will share with you here around the basics and the psychology of investing in shares.
A long term mindset is crucial. Thinking about making money on a particular share investment within a month or even a year is far too short a timeframe. If you happen to buy at the top of the market, you might be sitting on a loss for many years before prices start to rise again. Ask anyone who bought shares in Amazon in 1999, at the height of the tech boom. It took another decade until prices reached that level again. For the patient investor who waited another 10 years, they would’ve been rewarded with an investment that increased 20 fold. And that, my friends, is why Jeff Bezos has a vomit-inducing level of personal wealth.
As a beginner, you want to consider diversifying your risk. You don’t want to make the same mistake I made by having all your eggs in one basket. Prices can do down as well as up. Seeing your portfolio slowly increasing over time is the aim of the game. A big, fast loss very much isn’t. Spread the risk.
Which Shares To Buy?
There is no straightforward answer as it will always depend on your personal circumstances, such as financial position, attitude to risk and the length of time you are willing to be invested for. But, there are some considerations for us all to mull over. First of all, why does anyone invest their money on the stock market? To make money.
How Can I Make Money From The Stockmarket?
There are only 2 ways to do this:
- Buy Low, Sell High
- Prices go up when there are more people wanting to buy a share than to sell it.
- Some companies also pay dividends to those who own their shares, usually once or twice a year. Think of dividends as interest payments that you get for lending your money to a company.
Unfortunately, there are no guarantees that you will make money through either of these methods. I know this as just before the financial crisis of 2008, I was seduced by RBS offering a sexy dividend of over 7%. So, I had my full time job and a sizeable investment with the same company on the eve of the biggest global recession in a generation. You can see where this one is going. The dividend quickly tumbled to zero as the bank fell into real bother and could no longer afford to pay shareholders anything. The share price snaked down 90% as the bank nearly collapsed. All in all, an absolutely catastrophic investment decision from yours truly.
When you are starting out, you might want to consider looking at shares in solid, well known companies with big dividends. This isn’t to say that they won’t drop in price, but these companies are less of an unknown quantity to get your head around when starting out.
Buy Low / Sell High
Investing in the stockmarket is like driving in a car with a windscreen that you can’t see through. You know where you have come from, but are guessing where you’ll end up next. Risky AF.
We know that shareprice of a company moves based on supply and demand, but what impacts the supply and demand? Well, lots of things, likes news, fear, greed, global and domestic economic conditions, political uncertainty, the list goes on.
But the overarching reason is expectations of future profitability. Which is why companies like Amazon saw their share price increasing for years despite not making any profit for nearly a decade. Investors saw it as a great opportunity for future success, so were happy to keep buying.
You can see the best dividend paying companies here. You’ll often find the big oil, utility and pharmaceutical companies featuring high up these lists. But, like my experience taught me, just because a company pays a high dividend today, it doesn’t always mean it will in the future.
If you aren’t looking for slow and steady returns over the long term (erm, why not?), you might look beyond these companies to smaller, younger firms. The prices are typically more volatile and the dividends lower, but if you have knowledge of the industries in which you are looking to invest in, there are many more companies to investigate. But remember, for every Amazon, a startup turned superstar there are thousands that never see the light of day.
How To Buy Shares
Once you’ve decided which shares you want to buy, it’s time to open an account with a broker. There are dozens of established brokers online, but Hargreaves Lansdown is the one I currently use to buy, sell and manage my shares and pension. Be sure to choose a reputable broker that offers the products you are looking to buy and be aware of the fees that they charge, some providers charge a percentage, others a flat fee. If you are investing a large amounts, a flat fee may make more sense for you.
Also, be aware of the tax that you could be saving. Opening a stocks and shares ISA account to put your investments inside is a tax benefit you really should make the most of. This shields you from paying any income tax or capital gains tax on your investments up to £20K per year. If you are investing in the stockmarket, an ISA is an absolute must.