Can You Really Make Money in Shares?

Absolutely, in fact, managing a portfolio of shares can be a very rewarding and valuable learning experience. But it will require you to be disciplined and follow some effective but powerful rules to ensure you protect your capital and your psychology.

While the idea of making money is exciting, it’s important to understand that investing in the stock market can be risky without the right knowledge and skills. And while there are no guarantees in life, if you are prepared to learn proven strategies as to how to buy and sell shares that will ensure you are consistently profitable, you are less likely to experience significant losses.

So, what should you consider when it comes to making money in shares?

Invest over the medium to long-term

If you invest in shares with a long-term perspective, you can increase your chances of making money. This doesn’t mean the age old mantra of ‘buy and hold over the long term’ that results in very mediocre returns. What I am referring to is the opportunity to take a more active approach by investing in the top 20 stocks on the Australian Securities Exchange (ASX).

These stocks are highly liquid well established businesses that are purchased heavily by the institutions and typically pay good dividends. They also represent the least amount of risk while you’re learning to make money because there unlikely to have huge swings in price that are present in speculative or mid-cap stocks.

Buying cheap

Many people buy stocks because they perceive them as cheap, but just what do we mean by cheap? Is a stock that is falling in value cheap? Maybe, provided it doesn’t continue to fall once you purchase it. Is a stock trading under $5.00 cheap? Cheap in comparison to what? Is a stock that is trading under a $1.00 good value? Possibly, although many of these stocks are referred to as ‘penny dreadful’ stocks and for good reason.

The point I am trying to make is that the mindset of ‘buying cheap’ in the stock market is a myth that could cost you a lot of money. That’s because while cheap implies you will get a bargain, which maybe the case when you shop at the supermarket, this mindset is not the best strategy to adopt when investing in the stock market. You want to buy quality not quantity because this is where you will generally get the greatest gains.

Diversification

Diversifying your investment portfolio is crucial because spreading your investments across different sectors can help you to manage risk. But a portfolio of shares that is over-diversified (for example, more than 12 stocks) is exposed almost exclusively to market risk, which cannot be eliminated by diversification.

The truth of the matter is that for individual investors to achieve maximum diversification and minimum risk, you only require between 5 and 12 stocks in a portfolio. In fact, a smaller portfolio of shares not only allows you to reduce your risk but increase returns. It will also minimise the costs of operating a portfolio.

Timing the market

For those in the know, timing the market is everything. Timing the market is about buying low and selling high, which is where the small investor has a huge advantage. Getting it right will alleviate the problems associated with having your capital tied up for years in unproductive investments.

Timing your entry provides you with the flexibility to move smaller amounts of equity between stocks and to only be in the stock market when it is rising, which results in creating a portfolio that outperforms the index by a significant margin.

Selling stocks when the market is falling or moving sideways will enable you to compound your returns by selling shares at a higher price and buying more at a lower price. It will require you to be a little more proactive than a ‘buy and hold’ strategy, but the outcome is worth it.

Develop your trading plan

If you have never been somewhere before, it’s unlikely you will ever get there unless you have a road map. In the stock market, your road map is your trading plan—a written strategy that ensures your long-term success in the stock market.

When you invest, you want to do so with the highest probability of success. With this in mind, and knowing that as humans we can become very emotional, you need to develop a set of rules that are measurable, logical and most importantly repeatable.

The rules have to be consistent in their application rather than subjective. The more subjectivity, the more our emotions play with our decisions and consequently effect the outcome. A good trading plan, however, will help overcome this subjectivity and will work for you if you work it.

Managing your risk

Successfully investing in the stock market is not about how much money you can make, rather it is about how much you do not lose. In other words, it is about minimising risk not maximising profits. Nonetheless, it has been my experience that many people actually focus on the latter with little regard for the former.

But the most successful investors I know consistently average a very good return (usually above 20 per cent) on their portfolio by minimising their risk. If you think about it, not being exposed to heavy losses is, in itself, one of the key principles to successful investing.

In simple terms, a stop loss a price point where you want to sell a security and is used to either preserve capital when a recently entered trade turns against you or to protect the profits of a winning trade.

Educate yourself

Most people I know just want to achieve a good safe return on their investments and want a no-holes-barred approach to doing so. No bright lights, no bells and whistles, just plain simple strategies that will enable them to achieve financial independence. With the knowledge contained in my award winning book ‘Accelerate Your Wealth’, you will be able to make decisions that will be equal to or better than the best educated and resourced people in the investment industry.

Some of what you read will require you to change your attitudes and in some cases your bad habits. But I guarantee that if you follow the strategies I teach in this book, you will be able to achieve better returns than the majority and pocket the fees you would otherwise pay to have someone else manage your money.