TAKE THE TIME TO LEARN THE BASICS

The stock market is touted to be a very complex and dynamic system, which is why it is vital before making your first investment to take the time to learn the basics. Understanding the fundamental components of investing will go a long way. For example, what is a stock, bond/mutual fund? What can influence the prices of these assets? Understanding the concept of “buying low, selling high”, etc.

EVALUATE YOUR PERSONAL RISK TOLERANCE

With any type of investment in the stock market comes some degree of risk. The reality is that economic conditions have the potential to unpredictably fluctuate and there are many determining factors that can affect this.

With that said, it is imperative for individuals interested in investing in the stock market to consider the level of risk they are able to comfortably maintain. This requires honest examination of their monthly income, average monthly expenses, disposable income, need for emergency funds/“buffer” cash, etc. This will then aid in regulating the level of funds that can then be contentedly invested.

CREATE TIME-BASED/LONG-TERM GOALS

When investing, one of the first key elements to consider is the purpose of your investment and the time horizon associated with your goal. For example, saving for retirement, funding to purchase a new vehicle, building capital for future college expenses, etc.

Long-term investment is often encouraged when investing in the stock market, and along with the correct guidance, this “buy and hold” mentality can prove to be very beneficial to willing investors.

Adversely, large short-term profits may entice those who are new to the market, but this may often require the specialised skill set or expertise of an individual such as an “active trader”.

IMPORTANCE OF DIVERSIFICATION

The most common technique used by investors to mitigate risk is to develop a well-diversified portfolio. This involves ensuring that allocations are properly dispersed among different financial instruments, market sectors, industries and other groupings.

Although most investment professionals will agree that diversification cannot guarantee against loss, it does, however, help to maximise returns by investing throughout different sectors that may react inversely to the same economic event as well as to reduce the impact the volatility of an asset price movement may have on the portfolio.

EMOTIONAL CONTROL

As a long-term investor it is essential to keep an open mind about your portfolio performance. Of course, one should never ignore market signs and the shifts that occur over time, but try not to panic over times of short-term fluctuations in prices and resist letting unit changes of a few cents cloud your judgement.

ALWAYS HAVE A MARGIN OF SAFETY

Regardless of the investment choices made, it will always be ill-advised to subject the entirety of one’s capital directly into the stock market. Though great portfolio performance may lure investors to incessantly add to existing securities, one must always keep in mind the erratic and volatile nature that the stock market hones.

It is critical to create a financial “safety net” so as to aid in accommodating for the moments of emergency and the occurrence of the unforeseen.

DO YOUR HOMEWORK

Never should an investment be done with a blind eye. Whichever market sector or company you are interested in investing in, do the research.

Gain as much market knowledge as possible (speaking with a financial/brokerage advisor, reading annual company reports, company financial statements, paying close attention to company news, etc) so as to assist in making the most well-informed decision possible.

Try to never get caught up in a “hot tip”, and always attempt to put as much substantial backing as possible to justify your investment.

INVEST IN COMPANIES WITH A STRONG FOUNDATION

All investors, whether new or seasoned, must understand the importance of investing in strong, well-established enterprises. These blue chip companies are often able to maintain their financial backing and fiscal strength to overcome most financial downturns.

In frequent cases of economic hardship, smaller corporations are usually faced with a much harder task not only in preserving their current market revenue but also to avoid filing for dissolution all together.

Blue chip firms tend to operate in a more favourable and profitable manner during the times of these adverse economic conditions.

As such, the general long-term market trend of these businesses tend to be on a more stable incline and can help to provide investors with more reliable and consistent growth.

Kevin Wright is a brokerage associate at Stocks and Securities Ltd.