Investing in shares can seem a challenging task. Terminology like ‘derivatives’ and ‘shorting the market’ can be confusing and leave many Ma and Pa investors deciding it’s all too complicated. Yet investing in shares isn’t that confusing if you choose to keep it simple and the share market has historically provided good returns provided you’re willing to be patient.
Owning shares in a company gives you partial ownership of the business and the assets behind it. When you buy shares in BHP you own a portion of the company and the mining assets it owns. If the company does well the share price can go up; if it doesn’t the price can go down.
Sometimes however a company performing well may see its share price drop or a poorly performing company may see its share price increase. This is the market at work. The share market can be dependent on investor confidence and other factors such as economic news and even the performance of share markets overseas. Often share prices will dip because the market overall has dropped or some overseas news is perceived as a negative. This can often be completely unrelated to the company but their share price can be dragged down as a result.
There are several Do’s and Don’ts to consider when investing in shares. Here are a few of the more important ones.
Spread your risk. Investing in just one company will leave you vulnerable to its performance. Spread your risk by investing in companies involved in different economic sectors, investing in overseas shares or spreading your investment over different types of investment vehicles other than just the share market. One can be a dangerous number.
Beware of the ‘next sure thing’. Friends and investment advisors will always promise you they have found the Holy Grail; the next great investment that is going to take off. Chances are if they know about it so will others and the price will already reflect the promise. Be careful of those promoting guaranteed returns – there are no guarantees with any investment.
Don’t try and second guess the market. No one can predict what the market will do next. Attempting to buy and sell ahead of changes in prices will most likely see you attracting high trading fees and little else. The market can be anything but predictable.
Educate yourself. Share brokers will normally be divided into two types; discount brokers who just provide a buying and selling service with no advice included and full-service brokers who can advise you on which shares they feel you should buy. Full service brokers will have higher commissions but generally employ a team of investment analysts to dissect company’s and determine their value. Either way it pays to educate yourself on the market and know what is happening with the companies you choose to invest in.
Watch for hype without profits. Often new companies will arrive on the share market with much fanfare and promises of great riches to come. Frequently they don’t deliver. The value of a company is ultimately related to the profit it delivers and this is always the first question to ask when deciding whether to invest.
Share investing needn’t be complicated. To quote the world’s greatest investor, Warren Buffett, “Price is what you pay; Value is what you get”. Follow this simple advice and you won’t go too far wrong.
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The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a financial adviser or other finance professional.