How to start investing: tips for those who want to earn on the stock exchange

YEREVAN, 26 June. /ARKA/. Investing is the purchase of assets that will increase in value and bring income in the form of lump sum or regular payments. If you approach the process competently, you can earn money to realize your goals, even the most ambitious ones. Non-systematicity and lack of knowledge, in turn, are very likely to turn into a negative experience.

In this article, we have collected a few basic principles that will help beginner investors get started on the stock exchange.

Investing is not just about money!

A rule of thumb to learn before you even start strategising: investing is not just about money, but also about time and your own intellectual and emotional resources. Be prepared to put your energies into achieving results, treat new experiences as opportunities to grow and learn. There are always tools and methods that you don't know about yet. This principle is applicable in any field.

Set your financial goals

A goal is the basic element of an investment strategy. A clear understanding of why you want to make money in the stock market motivates and disciplines you. You should formulate a specific detailed goal, determine its value in the future taking into account inflation and set a time frame.

Short-term investments are- investments for up to a year (repairs, buying a car), medium-term - from a year to ten years (to buy a flat), long-term - more than five years (to ensure financial stability in the future, to pay for children's education).

The portfolio composition and risk tolerance depend on the time horizon.

Determine the amount to invest

Focus on your goal and the state of your finances to calculate the amount you need. To understand how much you are really willing to invest, you need to keep a budget. Knowledgeable investors develop the habit of recording their income and spending. Even if you rely on professional advisors or managers, remember that it is in your best interest to control the situation and take care of your own money.

It is equally important to be objective and decisive. You should enter the market when your income consistently exceeds your expenses. Do not invest the last funds and large sums, the loss of which will be a serious blow to your financial situation and psyche. However, do not postpone the first steps until the formation of an impressive starting capital. It is possible to enter the market with small sums. First, you need to gain experience and understand how the chosen strategy works.

When determining the amount, also consider the associated costs in your particular case. This may be a commission to a broker or a fund.

Select instruments

There are four main asset classes for investing:

Let us briefly remind you what each of them is.

Shares are securities issued by companies to raise funds. By buying them, the investor becomes a co-owner of the business and is entitled to a percentage of the profits. Since the success of issuers is not guaranteed and the market situation can change, shares are considered a risky instrument.

Bonds are debt securities of states and companies. The investor receives payments at a fixed rate for a certain period of time, and at the end of the term also returns the invested funds. Bonds are a safe instrument with a guaranteed yield in case of a reliable issuer

Real estate - a building, a house, a plot of land. There are several ways to invest in property. You can buy a property and then rent it out or sell it, making a profit on the difference. There is also a management strategy: sublet the flat and find temporary tenants. Each method differs in its nuances, pros and cons, and risk level.

Commodities are agricultural products, energy and metals. Since resources are used in industry, market demand can be affected by natural conditions. Most investors do not invest in physical commodities, but in securities of companies involved in this field.

You can also buy a stake in a mutual or exchange-traded fund. They select the optimal composition of the portfolio, and the investor thus owns many assets at once.

Burton Malkiel, the famous economist and writer, distinguishes the class "cash". This includes coins and banknotes, demand deposits and short-term securities that can be quickly converted into cash without risking loss of principal, such as treasury bills.

Determine the level of risk

By understanding in advance how different market situations will affect your behaviour, you can save yourself from mistakes - impulsive and wrong steps. Risk profile is a portrait of an investor, that takes into account objective parameters (financial status, marital status, age) and individual characteristics (temperament, mental attitude). Risk tolerance influences the choice of financial instruments. It is important to determine one's attitude to changing market conditions, sharp fall and rise of securities. The "make a lot of money in a short time" model is very attractive, but only experienced players with an aggressive strategy can realise it. This approach should be abandoned by beginners and people experiencing high stress due to the fear of losing money.

The risk tolerance, as we wrote above, is determined by your goals and timeframe. So, if you need to save money or guarantee capital growth, it is better to choose a deposit. And for long-term investment you can concentrate on shares. If you are planning for years ahead, short-term falls will not be fatal.  

The level of risk depends on the strategy. Venture capital investment - investing in promising, most often technological companies - is not the safest option, but in case of success, it will bring large profits. Even greater risks are associated with a speculative approach: buying assets for a short period of time and quickly reselling them when the price rises. The transaction can take place within a few minutes. For novice investors, a portfolio approach - buying several types of assets - is the most optimal. It allows you to reduce risks by distributing funds.

Portfolio averaging is considered a suitable method for beginners. In this case, the investor regularly invests money in securities of interest over a long period of time, regardless of their position in the market. This approach helps to develop discipline, does not turn out to be very stressful and does not require constant active participation. Regularity of investment mitigates the negative impact of downturns because you end up buying fewer stocks at high prices and more at low prices.

Build a balanced portfolio

Stick to the principle of diversification: build a portfolio so that when some positions fall, the losses are offset by the growth of others. You can combine different instruments (stocks, bonds, deposit) or assets from the same class, for example, 20-30 securities of several issuers. There is also diversification by sector and country. In the first case, you invest in companies in different market segments, in the second case you buy assets of foreign issuers.

Take care not only of the income part of investments, but also of the protective part. The latter allows you to cover expenses in unforeseen situations. The profitable part is formed at the expense of more risky and profitable instruments, while the protective part is formed from guaranteed sources and liquid assets. Therefore, especially at the initial stage of investment, include not only shares of promising companies, but also large status participants ("blue chips"), as well as consider deposit and bonds.

In conclusion, here is a checklist for novice investors

- Use tools and strategies that are easy to understand

- Focus on specific goals

- Follow your plan, but do not be afraid to make changes

- Analyse the situation, do not let other people's opinions and emotions influence your actions.

- Start investing when your financial situation is stable, but do not wait for the "perfect moment" - it does not exist. You can always find reasons to put something off, because that is the easiest way to do it

- Don't ignore risk profiling

- Take your choice of partners seriously

- Be prepared for some periods to experience downturns. You may have to lock in a loss and give up unprofitable securities.

- Diversify your assets

- Increase the level of knowledge and skills.

This article was prepared within the framework of the joint project "The Year of Investing in Oneself» by ARKA and AMI Novosti-Armenia news agencies and Freedom Broker Armenia. 

 

  

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10:00 06/26/2024