Wondering how to buy shares in the stock market? Would you like to know how to invest in the market, but fear losing money as you have never bought shares before? In this article, we take a look at the 6 key points that will guide you to buying shares in the stock market.
What is the best stock to buy?
Quite often, as a professional analyst and trader, I’m asked the question “What is the best stock to buy?” Unfortunately, there’s no simple answer to such a broad question as there are so many variables. That will affect my response. Such as; how long do you want to invest, how much capital are you looking to invest with, what stocks you might already own, what your Risk tolerance is, and what are your expectations for return.
This will typically lead to a lengthy conversation that leaves the enquirer a little more confused than where they started, and without a course of action to participate in the markets. So I thought I’d take the time to go back to the very beginning, and highlight the key points you need to consider (or ask) when starting out buying shares in the stock market.
How to Buy Shares
There are 6 key areas where you need to make a decision.
1) Understanding the basics of the markets – what are the strategies for making a profit?
Buying stocks at a low price, and selling at a higher price for a profit is the simplest form of investing. When I start discussing how to buy shares in the stock market with a beginner, the first topic I explain is Strategy.
Bottom line is we don’t actually know what the stock market will do in the future. However, I can with absolute certainty, state that the stock market will rise, fall or remain sideways today, tomorrow and in the future.
By understanding this simple fact, I can start to implement strategies to suit different market conditions. The key is therefore learning how to analyse the markets and to come to a decision on what are the current market conditions so I can adopt a strategy that suits.
You should begin by learning the different means of investing in the markets. Where I recommend you gain some understanding is; the Types of Stocks to consider (Blue Chip, Small Cap, Growth or Value), What are Options, and What are Exchange Traded Funds (ETFs).
2) Advice – how will you make a decision on what stock/s to choose?
Quite often I am presented with the statement “I can make better decisions than my fund manager, or advisor”. And at times, this is certainly true. Majority of advisors rely on the stock market rising to make a profit. But by understanding the strategies available to you with stocks, options and ETFs, you can start to benefit from falling and sideways market conditions as well! This surprises people when they hear this, with responses such as “surely that’s illegal” or “that can’t be done!” Fact is, we most certainly can profit from a falling market or sideways market trading stocks and utilizing options or ETFs.
You have two choices when it comes to how you make your decision to invest:
1) Use an advisory service, or
2) Make the decision yourself.
Advisors will charge you for their services. You need to feel comfortable with the (past) results, communication, and decision making process of your advisor. But just like a mechanic, you have the choice of changing advisor if you are unhappy with their service.
If you want to make the decision for yourself, then you will have a lot to learn. Whilst I believe anyone can learn how to buy shares in the stock market, and that it is a relatively simple process, without taking the time to learn analysis methods, your decision making process becomes a hit or miss affair.
There are two key techniques of analysis that are used for deciding how to buy shares in the stock market. These are: Fundamental analysis, and Technical analysis. Both have their strengths and weaknesses, and are better suited for specific strategy approaches.
3) Brokerage services
To buy shares, you must use a licenced stock broker to place the orders for you. It’s like taxes … they are a given.
Your advisor may actually also be your stock broker. However, if you were to subscribe to a Recommendation service, then they may or may not have brokerage services available. At the same time, you may be able to source a better brokerage service.
When you choose a stock broker, you will want to consider
- Execution – is the broker able to get your orders filled at reasonable prices?
- Cost – are you using a Full Service broker, or a Discount broker. You won’t get advice from a Discount broker, but the transaction costs are cheaper and you have to place the orders and manage the trade yourself.
4) Investment Capital
How much capital you invest in the markets will have a direct impact on how you approach buying shares in the stock market. I quite often hear people say “I’m willing to lose this amount”. Unfortunately, this type of attitude is setting up for failure. Many investors also have stars in their eyes. They expect to choose a stock and make a million dollars on the first trade, having only invested a few hundred dollars.
You need to establish a realistic expectations of return, based on the amount of investment capital you intend to commit to the markets. If you took $1,000, it would be unrealistic to expect to make $1 million in 12-months time. While it is possible, it’s not probable. To achieve that type of return, you would have to make many trades, or pick every trade that goes up, or continue doubling up your wins. Sound like a gamble to you?
If you are committing to investing in the stock market, be aware that there are Risks, and what impact a loss in value will have on your personal finances. But remember the old saying “it takes money to make money”. The more capital you are using to invest in the markets, the more you are able to diversify and adopt strategies to suit different market conditions.
The stock market is far more volatile today than it has ever been. The Internet and computers have made buying shares in the stock market a very simple process that anyone can do, from anywhere in the world.
Traditionally, the Buy and Hold method was the only strategy available to personal investors. The increase in market volatility and access to information has created more panic buying and selling. Hence, the Buy and Hold, or as I like to call it, the Hope and Pray method require more management by the investor.
You will need to spend more time analysing and making decisions the shorter the time-frame you intend to invest for. You also need to adjust your expectations of returns depending on time-frame. To expect a stock price to rise 100% in just a couple of weeks is a low probability, compared to expecting a stock price to rise 8.7% over a year (which is the average annual stock market return for the last 20 years: source http://www.asx.com.au/documents/products/ASX_Report_2012.pdf).
6) Risk tolerance
If you can’t sleep at night because of your investments in the markets. Then you need to adopt a strategy/s or evaluate your Risk invested in the markets.
One of the biggest problems I have when dealing with investors is that due to the internet and accessibility of information, that they have instant access to the stock market. They continually check stock prices, and any little movement against their position, they end up calling for an update on why. Don’t watch intra-day stock market movements if you are investing for the long-term.
Part of your investment plan should include when you should cut your losses. If a position were to trade against you. There have been far too many stories of investors putting all their eggs into one basket and that company goes bust, losing their entire investment portfolio in one hit. So you need to Diversify (that is, choose several positions to spread the Risk. Preferably in unrelated sectors/industries). And you need to establish a price point or rules for when you should sell your position/s. Even if they are at a loss.
These 6 points in how to buy shares in the stock market by no means incorporate everything you need to know to be a successful investor. They are a starting point on which you can build on over time. Just like a Doctor, you don’t become a professional overnight. It takes time to learn, practice, and evaluate.
Learning how to invest in the stock market can be an exciting and lucrative venture. If you are willing to invest your time, keep an open mind, and source the right education. It can also be extremely rewarding financially and mentally.
I heard a saying many years ago, which I have quoted ever since. Unfortunately, I’ve forgotten who the quote came from. “The stock market is the hardest way to make an easy dollar”. Learning how to buy shares in the stock market is an easy process. It’s a simple process of identifying when a company has the potential to rise or fall in value. What makes it difficult is the emotional attachment we have to money.
To overcome this, the 6 key points we have outlined above in how to invest in the stock market will become the basis of your future investing approach.
Knowing how to pick your stock is arguably the most important aspect of your trading business. Yet is often overlooked. As focus shifts to the excitement of the trading strategy. By taking into account both the technical and fundamental factors, your odds of success are dramatically improved.
How to Invest In Shares
If you are interested in Buying and Selling shares or learn how to invest in shares we have some free educational videos for you. You can learn how to invest in shares and how to buy shares in the stock market here.