Australian investors have for a long time loved both property and the stock market.
Our love affair with property is continuing given historic low interest rates. However, on the other hand, investing in the stock market is also something that Australians have been doing for a long time and have seen as an opportunity to become financially free.
Investing in the stock market is a great opportunity to build a large asset value for those who are willing to be consistent savers, make the necessary investment in time and energy to gain experience, appropriately manage their risk, and are patient, allowing the magic of compounding to work for them.
Here are our tips for beginner investors:
- Set Long-Term Goals
Ask yourself why you are considering investing in the stock market? Are you prepared to be there for the long-term or will you need your cash back in six months? Are you saving for retirement or looking for a home?Before investing, be clear about your purpose and your timeframe. If you are looking at having your investment returned within a couple of years, really consider another investment. The stock market and its volatility provide little or no certainty that all your capital will be available when you need it.
The growth of your portfolio depends upon the following factors:
- The capital you invest;
- The amount of net annual earnings on your capital;
- The number of years of your investment.
- Understand Your Risk Tolerance
Tales of other people’s huge gains can be tempting, but the market won’t always go in your favour. You should and must be prepared to see your investment drop as well as rise.You should understand your tolerance to risk rather than appetite for reward. Risk and reward go hand-in-hand, and your risk tolerance is how you feel about risk and the degree of anxiety you feel when risk is present.
Risk tolerance can be defined as “the extent to which a person chooses to risk experiencing a less favourable outcome in the pursuit of a more favourable outcome.” In other words, would you risk $100 to win $1,000? Or $1,000 to win $1,000?
We all vary in our risk tolerance, and there is no “right” balance. Generally speaking, you should never own an asset which keeps you from sleeping at night. During periods of financial uncertainty, the investor who can retain a relatively cool head and follows a methodical decision process invariably comes out ahead.
- Control Your Emotions
The biggest challenge to stock market profits is an ability to control one’s emotions and make logical decisions.A person who feels negative about the stock market is known as a ‘bear’, while their positive counterpart is known as a ‘bull’. The constant battle is reflected in the constantly changing price of securities.
When you buy a stock, you should have a good reason for doing so and the expectation of what the price will do. You will also need to work out at which point you will liquidate your holdings, especially if the stock doesn’t meet your expectations.
- Learn the Basics
Take the time to learn the basics about the stock market. Get familiar with the financial metrics and definitions used in the stock market such as earnings per share (EPS), return on equity (ROE) and compound annual growth rate (CAGR). Knowing how they are calculated and having the ability to compare different companies using these metrics is important.
- Diversify Your Investments
Experienced investors will tell you that stock diversification is a good way to manage risk and your exposure. They own stocks of different companies in different industries, with the expectation that a single bad event will not affect all of their holdings.Remember, diversification allows you to recover from any immediate loss without impacting your total portfolio. You also need to be in the stock market for the long-term to reap the benefits.
For more information on how to get started investing in the stock market, talk to us today.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.