The stock exchange is a lottery, where you can dramatically change your destiny. It is a chance to become a millionaire or to lose the invested capital. Many beginning traders want to be sure that they will not "go bankrupt". But are there any guarantees of success for those who take part in exchange trade?
So, let's try to look into it in detail and in order.
To begin with, it is not enough to have a certain amount of money and the desire to invest it in a profitable project in order to get dividends. In order to multiply the start-up capital, it is necessary to understand the intricacies of the trading sphere, to be able to choose a reliable broker, and, in general, to understand which method of participation in trading can lead to wealth.
What is the idea of investing?
Often the idea of investing comes to those who have a deposit bank account, but the low interest offered by the financial institution makes them look for options to increase their capital.
This is a normal desire, however, it is worth bearing in mind that a higher return on deposits implies higher risks. The main thing is that the investor consciously went for the financial risk and calculated if the project is worth the risk of his capital, because serious investing is not a thousand or two dollars, but larger figures.
In general, with a sober assessment of risks and the availability of "free" money, the best solution can be an investment in a popular asset such as securities (stocks, bonds). But before that, it is highly recommended to master the nuances of trading on the stock exchanges.
What is a share?
It is an equity security, which confirms the right of ownership. In other words, the purchase of shares in a company (i.e. investing in the company) means that the investor is buying an equity interest. The size of the stake depends on the number of shares purchased and their percentage in the total amount of securities issued.
Income from investing in shares is possible:
- the process of buying and selling shares;
- through dividends (a percentage of the company's profits, which is calculated over a certain period).
Classification of shares
In the financial environment it is customary to distinguish between two categories of shares:
- preferred (AP).
Such securities, as a rule, up to 25% of the total number issued by an enterprise or company.
The advantages of buying such shares are:
- a fixed amount of payout,
- guaranteed and regular dividends;
- priority of receiving a share in the event of bankruptcy/liquidation of the company.
The price of preference shares is an order of magnitude lower than that of ordinary shares. The reason is its lower liquidity and impossibility to participate in voting. If the investor is counting on long-term investment, they are definitely more interesting and profitable over longer distances.
- common shares (JSC).
The proportion of shares of this type in companies should not exceed 75%.
Advantages for the investor of acquiring such shares:
- receiving profit from their sale;
- receipt of dividends;
- the right to claim the property of the company in case of its liquidation;
- the right to repurchase new issued securities before they are placed on the market, etc.
The ownership of ordinary shares (for example, their small number) assumes nominal participation in voting. Also, an investor in this type of stock has no way of getting back the money invested.
The exchange rate of common stock rises faster than that of preferred stock, so the investor has the opportunity to get a return on the sale in a shorter period of time.
Of course, any stock without exception can be interesting from an investment point of view. However, it is better for a beginning investor to pay attention at first to APs and stake on the so-called "blue chips". This is an opportunity to considerably reduce financial risks.
What to pay attention to when buying stocks
It is important for an investor to choose the most promising direction of the company, i.e. the object of their investment.
But even in this case it is important to hedge. Purchase shares of different companies.
It is also important to consider the level of liquidity.
This parameter of securities will give the opportunity to quickly and profitably get rid or, on the contrary, to buy a share. In this case, its price will be most attractive.
It is also important to take into account the nominal value of the share.
As a rule, the nominal price does not correspond to the market price. It is used for accounting purposes.
A novice investor should know that on the exchange floor he sees the market price, which is set in accordance with the existing supply and demand.
Equally important is the rate of return.
In fact, an asset such as a stock can be profitable not only due to dividends, but also due to an increase in the level of exchange value.
What is a bond?
It is a type of debt security. Its owner is given the right to receive its face value. He can receive the amount in cash as well as property. This can be done within a specified period, which is determined by who initiated and made its issue.
The low-risk and easiest way for a beginning investor is to buy
securities. Moreover, if the company or project is successful, it is possible to sell the asset at a profit after a certain period of time, if you wish.
An investor can gain profit from bonds most often due to their price difference.
However, there are risks of capital loss (for example, if the project goes bankrupt or the company goes bankrupt). At the same time, in the case of investing in securities, one should not rely on chance or luck. Making a profit in this case is an exact mathematical calculation, a reward for well-planned and carefully thought-out actions.
This is a kind of work for those who want to make money. Most often, the investor or his proxy tracks the news, moods and trends of the market in order to be able to react on the probable negative changes in time and transfer the money to a safer and more profitable asset.
The ways to get profit from stocks
- earning on the growth of the exchange rate;
- receiving dividends that are paid by the company whose shares are purchased by the investor (on average 5-8% per annum, depending on the invested capital and the success of the company as an investment object).
When is it better to give up investing?
Trying to make money on investing in securities or any other asset is advisable only when the potential investor has a sum without which he can do without for a certain period, for example, 12-36 months.
Usually the calculation is done this way: mandatory payments (housing, food, medical care, education, recreation, and contingencies) are subtracted from the amount of income. The figure that remains is the "free" money that can be used as an investment.
Otherwise, instead of getting the expected income, the investor may find himself in a financial trap: investing involves, as a rule, a project designed for at least a year. This means that the money cannot be used during this period.
Also, investing in securities does not guarantee that the investor will not lose all or part of his capital. Guaranteed deposits of individuals are relevant only for bank clients who open deposit accounts with banks. It is important to know that the amount of refund is strictly regulated, i.e. if there are large deposits an investor in the bank deposit must realize that he will not get back the whole amount, but a certain percentage: the maximum allowed amount, agreed within the limits of bank legislation.
The first steps of a beginning investor
Today, participants of exchange trading platforms work online, which greatly simplifies the task and expands the range of those who want to join the sphere of exchange operations online.
One of the conditions for an investor to work at a modern stock exchange via the Internet is to involve an intermediary, a broker. Most often, it is a company with a license to conduct exchange trading. Finding a reliable broker is not an easy task. It requires preliminary preparation, or rather several questions, the answers to which a potential investor must know before he goes further.
- How much money are you willing to invest.
In theory, there is no minimum amount, with which one can enter the stock market. In practice it is better to start with the amount with which you can compensate the costs of the intermediary (the broker's commission), and the possible dividends (interest) will be worth the time spent. To date, it is preferable to start from 5-10 thousand dollars, and then you will see the profit from investments.
This should not be a thoughtless action. In order to minimize the risks, it is recommended to calculate everything carefully, to check the broker. It also does not hurt to imagine a negative outcome of the event - the probable loss of money.
If the investor is upset by such an outcome, rather than ruined, you can try it.
- How much personal time are you willing to devote to investing.
This question is extremely important because it determines whether you will be dealing with stock operations personally or need help.
The first option assumes the following:
- Willingness to be trained;
- To study in depth the peculiarities of trading;
- Follow stock news and statistics on a regular basis;
- Do not lose sight of the financial charts, etc.
In this case it is worth looking for a broker, without whom you cannot go to the stock exchange. It means that the investor personally decides which securities to buy and when to sell. The broker's task is to become your technical operator, i.e. to fulfill the tasks set by the investor.
The second case when an investor wants to get rid of personal participation in trading implies the use of one of the trust management types. That is, the investor's money, but the fate of the capital is in the hands of a broker who has a power of attorney to manage the allocated amount. It means that the investor makes minimum decisions, since investment of the money is carried out by professionals.
The form of trust management can be different. For example, it can be:
- The conclusion of an individual contract with a company, which performs the role of a trustee.
In this case, the investor transfers in his name the amount, i.e., the desired contribution, and the broker himself determines what and when to buy / sell. If the broker is legal and reliable, his goal is your prosperity, i.e. investing his client's capital with maximum profit. At the same time, the level of risk is chosen by the investor himself.
- Investing in an investment mutual fund (Mutual Fund)
When choosing this form of investment management, the trader receives a ready investment portfolio - a ready-made set of assets (securities, etc.) of various companies. As a rule, these are shares of large enterprises, companies, projects, etc.
In this case, the investor entrusts the financial management of the unit investment fund to a management company. The investor chooses the fund which he or she deems most suitable for his or her purposes. You can buy units from a management company or use the services of a stockbroker.
The initial investment will grow if the management company is successful. The investor will make a profit if the units grow. Otherwise, the investor will suffer monetary losses.
- What strategy and assets you are interested in as an investor.
It is up to the investor to determine the types of assets and can determine the strategy to follow.
The Graham Strategy
Benjamin Graham, an American economist, trader, "father of value investing", teacher of Warren Buffett himself, suggested a methodology which implies deep analysis of companies before buying their stocks.
The basic idea of Graham's strategy is to buy stocks whose price is less than their intrinsic value (the sum of assets, profits and dividends).
William O'Neill preferred to select stocks that stood out for their strong fundamentals (the level of current earnings), and therefore had the potential to increase investor's profits. O'Neill preferred to invest in companies that practice issuing a small number of shares.
The forward and backward spiral strategy
The basic idea behind the strategy is to believe in companies that were at their peak years ago. The so-called expectation of their return, a rebirth. That is, companies with a slow but steady growth of positions. It is recommended to pay attention to the shares of companies whose activities are related to a promising area.
In short, it is a plan for buying/selling assets. To be more precise, it is a process of forming a system of financial measures, the task of which is to realize long-term strategic business goals. Typically, this is done through a combination of fixed (i.e., unchanging) indicators of the investment project, including the preparation of the documentary component:
- a package of documents on the project;
- supporting documents;
- collateral for the project ,
- performance evaluation .
It is the investor's style of behavior on the exchange, which includes indicators such as:
- selection of assets to be traded;
- activity on stock exchanges (frequency of selling/buying);
- what influences the decision to act in one way or another (topical news, analytics, professional recommendations, etc.).
If the investor wants to take the simplest route, he needs to decide
- which assets seem the most attractive for investment;
- how long they want to invest their investment capital for;
- how much loss he or she would like to take, and how much loss he or she believes is maximal.
If you see that the asset selection is unsuccessful and that losses exceed the maximum allowable limit you set, you should not wait for the period specified at the start: you must urgently sell, i.e. "drain" the toxic securities that "eat up" your money.
When choosing a form of fiduciary management, the investor cannot stay away entirely, either, because he is required to choose a strategy. But in this case things are somewhat different - the investor's choices are limited to the offerings that are already on the market. It is also possible to involve your manager in the discussion of an individual strategy.
- Who to entrust the role of intermediary.
Once you figure out the strategy, the search for a company that will act as an intermediary between you and the exchange will become much easier.
The main thing is to carefully check the intermediary to whom the investor plans to entrust the fate of his capital, and it does not matter who it will be - a broker, a trustee, a mutual fund management company. It is important that it be a company with a license, a positive reputation and experience in this niche.
When investing independently, the investor's algorithm of actions is as follows:
- Drawing up a contractual relationship between the broker and the investor.
Opening of a brokerage account. Making a start-up deposit.
Installation of specialized software on your computer for trading operations.
- Start of trading.
In the case of trust management, the algorithm of actions is significantly simplified.
- investor concludes an agreement for services.
- transfers money (transfers to the account) in the name of the trustee/managing company of the mutual fund.
What popular mistakes beginner investors often make
The mistakes investors make are fairly typical, but they always lead to the same result: loss of capital. So, what exactly should not be done by those who decided to become an investor:
Mistake #1. Investing all the money you have in assets (e.g., securities - stocks, bonds).
Let's emphasize again: Only "free money" must be involved in investing. It must not be funds without which you can't cover current expenses. And it can't be the amount you have set aside for unexpected expenditures.
It is best to start by opening a deposit account, and then move directly to investing.
Mistake #2. Relying only on your intuition.
The process of investing in securities requires an investor to have certain knowledge. Especially, if he plans to do it, i.e., to trade on stock exchanges by himself.
Profile training is available in different ways:
- on the website of most brokers;
- in the process of online and offline courses for "dummies" in the field of investing;
- self-development method (reading recommendations, reviews, specialized literature, etc.);
- the use of the demo-mode at broker sites, where you can try to trade (not real, but virtual) money for free without financial risks, i.e.
Mistake № 3. Being guided by emotions.
It is natural that depending on the results an investor is inclined to be either upset or happy, especially since his/her capitals are on the line.
However, acting too impulsively increases the risk that it will lead to losses due to incorrect decisions made under the influence of a heightened emotional state.
It is important for investors to learn to be firm and make decisions with reason, not emotion. Act firmly if you see that the market situation is not turning in your asset's favor, make a decision to sell immediately.
It is critical to determine the limit of loss that is acceptable to you as an investor. Many people succumb to the desire to delay withdrawal of their funds from negative assets and end up punishing themselves financially. If the value of assets decreases by a maximum of 20%, you should immediately fix losses, i.e. get rid of such assets.
Such a decision can minimize risks, and the investor gets a chance to invest the remaining amount in another, presumably more profitable asset.
Mistake #4. Refusal to diversify risks.
When it comes to investing, you must not, as they say, "put all your eggs in one basket".
The correct solution is to spread your assets across different areas. This means that it is safer to invest in securities of fundamentally different companies. Let some capital be invested in acquiring shares in pharmaceutical companies, mining companies, engineering, etc. In that case, if one industry goes into deficit, the capital can be preserved and increased at the expense of the other.
Mistake #5. Believing in instantaneous superprofits.
Trusting advertising promises is a way to lose money. Often, bright promises are generously handed out by swindlers, in order to "untwist" the investor at least for the start-up capital. This trap is mainly designed for newcomers, inexperienced traders.
In fact, the promise to increase profit by several times, to obtain 500% of income in a short period of time, for example in a month of participation in the auction, is nothing more than a deception. Practice shows that the more attractive the promise, the higher the risks of getting nothing.
It is always important for investors to "turn on" logic before making important decisions, to find out details and nuances, in order to be able to calculate the risks beforehand.
The stock market is very volatile and offers no guarantees - only crooks give them away.
The investor can only minimize his risks on the way to profit and choose a reliable broker, who will warn of risky moments. The responsibility for the decisions made and the fate of the capital is solely in the hands of the investor himself.
The desire to make money on investments can be justified and significantly increase the welfare of the investor.
Nevertheless, the way of investing cannot be called easy, because it is important to take into account many nuances and have certain knowledge.
If you just take things at random, do not calculate the risks and do not follow the trends, the risk of missing your chance of making a profit and losing your start-up capital will only increase.
For those who are just taking their first steps in investing, it is better to enlist the support of professional, trustworthy advisors and start with small deposits. However, even in this case, it is important to diversify risks.