Want To Invest In Shares? Here is a step-by-step guide for you

13 Jul 2020

Are you thinking to invest in shares? Kudos to you as you have chosen an excellent means to grow your wealth. But you need to do some basic things right if you want to be a successful stock investor. The ‘start’ is essential here, as it happens with most good things in life.

Don’t worry! We will guide you with step-by-step procedures here-

1. Select the investing style that suits you the most

There are different ways to approach investing in shares. You should follow the approach that represents your situation in the best possible way. You are said to belong to the DIY category if you want to choose shares and stocks funds by yourself. If you would like someone else to manage the entire process for you, you belong to the robo-advisor category. In this case, you will need to choose from services offered by major brokerage firms. They would invest your money in funds, depending on your specific financial goals.

Once you have made up your mind regarding your investment style, it’s time to open an investment account.

2. Open an account

You need to open an investment account if you want to invest in shares. A brokerage account is required if you belong to the DIY category. Else, you may open your account through a robo-advisor.

A brokerage account provides you with the least expensive and the quickest path to buy stocks. But while evaluating brokers, you need to consider various factors such as costs (account fees, trading commissions), tools, investor research and investment selection (commission-free ETFs, for example).

Robo-advisors will not require you to do due diligence in selecting individual investments. They will ask for your financial goals during your onboarding process. Based on your inputs, they will build your portfolio, which will be designed to achieve your specific objectives.  The robo-advisors will charge a fee instead of their services (most of them charge 0.25 %-0.50 % of your total assets under management. The robo-advisors will take care of everything related to your investment portfolio. You do not even need to go through this article any further. The DIY types will need to go through, of course.

3. Grasp the difference between stock mutual funds and stocks

For most of the active investors in shares and stocks, choosing the right option among the following investment types means a lot-

  • Investing in individual stocks- If you are following the progress of a particular company, you may consider buying one or more of its shares. Making a diversified portfolio of different individual stocks is also possible, but it requires a huge investment.

  • Investing in exchange-traded funds or Stock mutual funds

These funds will allow you to invest in small portions of different stocks, in one single transaction. When you invest in exchange-traded funds and Index Funds of companies, you own small portions of these companies. You can even make your own diversified portfolio by putting several funds together. These types of funds are also called equity mutual funds.

One advantage of the stock mutual funds is that they are intrinsically diversified and this puts you in less risk. But you are unlikely to see a meteoric rise as happens with some of the individual stocks (it needs to be a seriously wise pick though!)

4. Set your budget to invest

You need to ponder over two important things here-

  • The amount of money you need before investing in shares and stocks- This depends on how expensive are the shares chosen by you to invest upon. The price of some of the shares may even go up to a few thousand dollars.  If you have opted for mutual funds, an ETF may work the best for you, even with a ‘smallish’ investment. ETFs trade similar to stocks and you can purchase some of them for as low as $10 per ETF.

  • The amount of money you should invest in shares and stocks-

If you have opted for investing through funds, you may consider allocating a good chunk of your portfolio to stock funds and keep a long-term horizon to realize your desired return. For example, if you are 30 and want to invest in retirement, you should have almost 80 % of your portfolio in stock funds and keep the rest in bond funds. On the other hand, we would suggest you keep a small portion of your portfolio in individual stocks.

5. Start investing in shares

Get, set and go! You are all in readiness to invest in shares now! Investing in shares is an affair full with numerous approaches and strategies but if you go by the approach followed by successful investors, you would notice that they have stuck to the basics more often than not. They generally use funds for the bulk of their portfolios and choose individual stocks only if they see a huge potential in their long-term growth. So, to take a leaf out of their ‘success story-book’, take your time and do intensive research, if individual shares attract you. If you want to stick to stock funds, building a portfolio comprising of low-cost, broad-based options would be a smarter option. As Warren Buffet famously put some time back- the best investment for most of the Americans would be to invest in a low-cost S&P 500 index fund.

Tips for smart investing

Now that you are aware of the steps before you actually invest in stocks, we can now provide some important tips that will help you to formulate your own investment strategy.

Set long-term objectives

Before you start investing, you should have a clear idea about your purpose and the approximate time in the future when you may require the funds back. By knowing the time and the number of funds you need in the future, you will be able to calculate the amount you should invest and the expected return required to achieve the desired result.

Please note that the interdependent factors mentioned below have a bearing on the growth of your investment portfolio-

  1. The capital invested by you
  2. The annual net earnings on your capital
  3. The period of your investment

Have control over your emotions

The inability to have control over one's emotions hampers his ability to make logical decisions and thus, hampers his profit potential. Company prices determine the emotions of the investment community as a whole in the short run. Whenever investors are worried about the future of a company, the stock price of it declines. Whereas, the stock price rises whenever a majority of the investors feel positive about its future.

In market terminology, a person who is ‘negative’ about the market conditions is called a ‘bear’ while anyone feeling ‘positive’ about the market is called a ‘bull’. The constant ‘fight’ between the bears and the bulls gets reflected in the price fluctuations of stocks/securities. Rumors, speculations, and emotions drive these short-term fluctuations a great deal, rather than a systematic and logical analysis about the assets and market prospects of a particular company.

You should have a good reason behind buying a particular stock and a valid expectation about the future performance of that stock. You should also set a time period at which you may liquidate your holdings if your expectation is not met or your reason to buy that stock is proven invalid.  You should have a proper exit policy in place beforehand and you should be ready to execute that strategy when the time comes, in an absolute unemotional manner.

Assess your risk tolerance

It is a psychological and genetically based trait which is influenced positively by your income, wealth and education and negatively by your age. Your risk tolerance indicates your level of anxiety when risk is lurking around and your perceptions about ‘risk’. It varies from person to person.

Perception is an important determinant of risk tolerance.  For example, as you gather more knowledge about how stocks are traded, how price fluctuations occur and how to liquidate investments- you are more likely to be at ease with stock investing and would start considering it less risky than you would have felt when you started afresh. This is because your risk perception has evolved and your anxiety level is on the lower side now even if your risk tolerance remains the same.

By having a proper understanding of your risk tolerance, you can stay away from investments that may make you anxious in the future.  Anxiety is a stimulator of fear and this, in turn, triggers emotional responses, instead of helping you make logical decisions. This is the reason why you should stay away from anxiety, keep a cool head and follow a logical and analytical decision-making process- to be able to be a successful stock trader.

Diversify your investments

Diversification is a popular way of managing risk. Expert investors have a habit of owning stocks in different industries (in different countries, at times too!). This way, they make sure that all of their stock holdings are not affected by one single bad event.

The footnote:

Investing in shares and stocks is fast becoming popular among American businesses. But, there are risks too and we would suggest you take cautious steps, particularly if you are new to it. Monitoring the performances of your shares through the eyes of a stockbroker may be the best way for you in this case. An experienced stockbroker

can line up the best investments for you, as per your specific financial goals and your return horizon. He can also make the best decisions for you regarding when you need to buy and sell shares from your portfolio.

If you observe the state of the global economies these days, you would notice that most of them are constantly fluctuating. Therefore, careful monitoring of the economic indicators is required to predict the rise or fall of a particular industry, business or even a company. You can assimilate all these knowledge while you invest in shares and with continuous monitoring, you stand a great chance of growing as a stock investor.