There is an abundance of stories which exist online, reporting on the quick fortunes made by savvy stock market players.
Whilst plenty have played their hand at earning a quick mill, others have lost their life savings, investing all on a bad risk. Luck and wit contribute to success when navigating the stock market, but research and intelligence are key.
To understand how to invest wisely in the stock market, let’s start with some basics.
Know how the market works
Before you start, it’s fundamental that you understand what the stock market is; Its a place where shares in quoted companies are bought and sold through intermediary traders. In the UK that’s the London Stock Exchange, though most developed countries have their own stock exchanges.
In order to trade shares, you have to open an account with a ‘broker’ who will take your instructions on the share or shares you want to buy or sell and interact with a trader to execute the trade for a small fee.
Understand the different forms of share that exist.
Without complicating things too much, it is important to understand that there are two basic ways of buying shares.
You can trade a mix of shares from a ‘fund manager’ whose job it is to follow the fortunes of a particular market sector, such as banking, mining, retail services etc.. and based on this research, buy shares in those companies that appear to be thriving and whose fundamentals are sound. These shares are then bundles into ‘unit trusts’ and bought or sold through the stock exchange to retail investors, such as you or me.
Good fund managers have a range of tried and tested tools at their disposal and the shares they purchase for the Unit Trusts are the result of years of patient research using these tools. They add a premium to the true cost of the underlying value of the shares in the unit trust to reward them for the application of their expertise. There are ‘league tables’ for fund managers to give the retail investor an idea of what their individual track record is over time to enable them to make an informed choice.
Fund managers have the benefit of being attuned to the vagaries of specific stock market sectors and of individual companies and they understand how true or rumoured ‘takeovers’ or other events might impact the share price. Retail investors buying shares without such advice or knowledge are, in comparison, at a relative disadvantage.
Individual Company Shares
Retail investors working alone may choose to do their own research buy and sell shares in individual companies by themselves. This is notoriously difficult to do, as the information about the companies they are researching which will be available to them and the tolls they have at their disposal will be relatively limited compared to the company information and tools which a professional fund manager has. Despite this, some individual retail investors may feel that they can ‘beat the market’ finding out as much as they can about the companies through personal research and using their intuition to evaluate whether a companies shares will thrive or do badly.
This short piece should be a taster for the uninitiated who want to dabble in stock market investing.
The issues are far more complicated than can be explored in a tasting session such as this. Stock market crashes, company failures and a host of other risks which cannot be predicted are all factors to be considered. One must never forget that hard earned cash can be easily lost.
Experts always advise that those new to the stock market should always seek out a seasoned fund manager, investing time and research in identifying the right person to help you prosper.