John Lowe the Money Doctor in the third of three parts on the stock market gives invaluable advice and reveals the secrets of successful stock-market trading.
A stockbroker is described in Liberman’s collection as a man on the right side of a telephone but if you study Warren Buffet’s tactics and adopt same, you could be well on the way to your first million.
These are the simple rules when it comes to direct investment:
1. Do your homework.
Learn everything you can about a company. Look at its annual reports to shareholders (available free), search online for relevant news stories, read up on the sector in which it operates and its competitors. If possible talk to people who work for the company.
Bill Mann of motleyfool.com (a website for investors), for example, bought shares some years ago in the failing Delta Airlines after chatting with in-flight staff and discovering that they were willing to accept a pay cut to keep the company going. His investment increased in value by 127% in three months!
2. Have clear investment objectives.
Are you interested in generating an income? If you are, you should invest in highly profitable companies that follow a policy of declaring generous dividends. Are you interested in long-term capital gain? If you are, you should invest in companies that are more likely to stand the tests of time.
You also need to consider what degree of risk you are willing to endure. If a share price goes up you will clearly make money, but if the company does less well than expected or the market as a whole falls, then your investment could be worth less than you paid for it.
3.Remember to diversify.
If all your money is one company, or one sector, or one country then you increase your risk. The idea is to build up a portfolio of shares that meet your objectives and spread your risk.
4. Don’t be tempted to trade too frequently.
Whilst share-dealing costs have come down substantially, making it less expensive to buy and sell small quantities of shares, charges can quickly eat into your profits. Also, the more times you buy and sell the less you will actually know about the company you are investing in.
5. Educate yourself.
Educate yourself about the stock market and make sure you know how to read the financial pages of the newspapers. At the bottom of this article, I have listed some useful sources of information.
If you do decide to invest:
would suggest starting with the Irish Stock Market (one of the oldest in the world and dating back to 1793) and relook at some of the blue chip companies post 2008.
One useful website is the Irish Stock Exchange (www.ise.ie) which contains lots of information and tips.
The FTSE All Share Index stood at 1,793 on 4th January 1988 and currently stands at c. 4,010 as of 10th April – a 224% gain in 29 years despite the few hiccups!
The alternative to direct investment is participation in managed funds – for those who do not have the time to examine every decision and are happy to leave stock selection to the full-time experts and systems.
Most insurance companies and the stock-broking houses offer a selection of fund choices depending on your attitude to risk – email me for details.
Do remember, you should discuss your overall financial position with a professional adviser before you start investing in the stock market.
John Lowe is a Personal Insolvency Practitioner & managing director of Providence Finance Services Ltd trading as Money Doctor, regulated by the Central Bank and based in Stillorgan Co Dublin. He is the author of Money Doctor 2017 (Gill Books). For more information click on John's website.