HISTORY has shown that owning stocks is one of the easiest and most profitable ways to grow your wealth over the long term. Investing in the stock market is often seen as very technical and analytical. This can be daunting for the beginner who has no experience in this area. Despite this, stock market investing, like any other skill, can be learned with enough background reading and research. Buying a stock is literally, owning a piece of a company. For first time investors, it is important to adopt a very simple strategy when investing. One example of this is to buy what you know; namely, companies that you are familiar with and understand.

Determining your objectives will assist in dictating your investment profile. The gains expected from the investment will vary from person to person based on their risk appetite. Generally, there are two types of investment strategy which are applicable — long-term and short-term investing.

Investing long term normally pays off over time. Adopting this method allows you to take on greater risks. During this period, there will be market fluctuations that will cause stock prices to rise or fall which should not cause panic as the market usually recovers over time. The ideal approach is to select and invest in blue chip dividend paying stocks. The aim is to hold firm during market swings and at the same time, allow for a steady stream of cash flow over the years. Exiting the market when the prices are low will have a negative impact on your initial investment. Dividend payments may also be reinvested, each dividend that is reinvested increases your share holdings, which will result in a higher dividend payment in the future. Compounding is one of the most powerful ways to attain investment growth and dividend reinvestment makes this achievable.

Knowledge of the market is critical when doing short-term investing. It is considered to be high risk as this involves a lot of speculation and requires constant monitoring as losses are easily incurred. Funds intended for short-term use should not be utilised in this way. When trading short term, Invest funds that you are comfortable losing. The best way to achieve maximum benefits and safeguard your interest is to set aside a large portion of your funds for long term investment and diversifying.

Diversification is a technique that reduces risk by allocating investments among varying industries and other categories. The objective is to maximise returns by investing in different sectors that would each react differently to the same event.

Trying to determine the proper time to invest in the stock market is very difficult. However, one may examine market trends and other mitigating factors as a guide which will influence the outcome.

Contrary to common thought, one of the best times to invest in the stock market is when it’s performing at its worst. When the market plummets or stalls, it becomes a buyer’s market.

Stocks are liquid forms of value that often change in worth, sometimes drastically. When an economy starts to underperform, this creates panic and investors tend to sell off their investments rather than watch their portfolio decrease in value.

These mass sell-offs cause the entire market to go into panic mode, which impacts stock prices negatively across the board. Buying in a down market results in ‘cost averaging’ which means there is a greater opportunity to maximise your earnings in the future. Another important factor to consider when making investment decisions includes identifying strong fundamentals. Look for companies exhibiting solid sales and earnings in relation to its prior year and examine whether demand for its product or service is increasing. Consider the stock’s class; by choosing to invest in a small company with increasing growth prospects, as opposed to a large company that is a market leader, one gets an indication of their risk tolerance. Identify the appropriate industries that are poised to rebound as the economy improves and individuals and organisations begin to spend again. In a rising market, cyclical stocks such as those in manufacturing, finance and retail should resume growth.

In an economy of low interest rates, the stock market offers a viable alternative irrespective of its position. Opportunities exist each day for gains to be made whether the market is trending up or down. Investing in the stock market requires certain skills and commitment. For the average investor, this can be very intimidating and time consuming. You can leverage this by contracting the services of a reputable financial advisor who has the expertise to do the necessary research and analysis to guide you accordingly.

Patrick Robins is a wealth advisor at Stocks & Securities Ltd. Contact: probins@sslinvest.com.