Tips for getting started in the stock market
Hello,
Your post encapsulates the feelings of many when getting started in the stock market.
There are a couple of things that I would recommend before jumping right in!
a)
Have a strategy!
You ask "how do you normally go about sniffing out a good company and then deciding on whether it's a good buy or not". There are numerous ways of doing this. If you don't have a method already, perhaps ETFs are a good way to start off, as they offer automatic diversification at a low cost (visible through the "Total Expense Ratio").
For example, if you wanted global diversification, you could look at World Funds i.e. iShares MSCI World (IWRD-L) or you could focus on narrower regions i.e. SPY (SPDR S&P 500), EEM (iShares MSCI Emerging Markets Index) and ISF-L (iShares FTSE 100 GBP). None of these are traded in euro and this would have to form part of your decision making process also.
(Each of the above are examples of how you could achieve a geographically diversified portfolio and not to be taken as advice).
If instead, you would prefer to buy individual equities, you need to be armed with a consistent approach. Personally, I look for a stock that has a high dividend yield and a low P/E ratio and/or low P/Cashflow ratio. I buy about ten stocks and review periodically.
I use the InvestR Centre (subscription) web site to screen these stocks for me as well as the analysis provided by Rory Gillen.
b)
Open a low cost broker account
You say that "have an account and have money ready to go". Is the right type of an account for you?
Are you aware of the buying and selling costs? Are there any other fees that you will be asked to pay i.e.
- an inactivity fee (a payment if you don't make a number of trades per month for example)
- maintenance fee (a payment charged to maintain your account)
- if the broker is outside of Ireland, will they receive a Euro transfer or do you automatically have to pay foreign exchange fees?
Also, you have to pay stamp duties as follows;
- 1% on Irish shares
- 0.5% on U.K. shares
- 0% on U.S. shares and ETFs
Will this influence your decision?
Expenses increase losses and decrease gains. If you spend 5% on transaction fees and taxes, you need to make 5% in the market to get back to zero. Before you invest time and money into generating a return from risk assets, ensure to keep your costs as low as possible by opening an account with a discount online broker to keep your profits in your pocket!
(c) Don’t get emotionally attached
If you got on the wrong number bus, would you get off if you realised it was going in the wrong direction? Of course you would! My own golden rule of getting out of a stock is “sell when the reason you bought the share no longer exists”. As a result, you can objectively look at the share and not let gains or losses influence my decision. After all, if you have made or lost money on the company, this relates only to your own circumstances and not to the potential of the share in the future. Why should it form part of your decision then? Treat a share price like a number... that’s what it is.
(d) Understand the difference between speculating and investing
Finally, most people consider themselves investors when, in fact, they are speculating. If one goes into the market trying to make money on a very short term basis and is in-and-out quite often, the odds are stacked against them. Remember that you are buying part of a company and very few make significant returns over a couple of days or weeks. It takes time to develop an enterprise. In addition, if you transact frequently, you will have to pay every single time.
Best of luck and if I can answer any other of your questions, please post them!
Susan Hayes
