How to be smart with shares
Published in the Sunday Magazine, Herald Sun, July 2011 by Carrie Hutchinson
With a small amount of cash and some good advice, playing the stock market can give your bank balance a nice boost.
1. Become a student of stock
The jargon may be daunting, but learning the lingo will help you understand where your money is going.
"There are fantastic financial dictionaries online, such as Investopedia.com," says author and wealth adviser Analaura Luna, "and the financial sections of the news and newspapers are a great way to immerse yourself in the language."
2. Practice makes perfect
Rebecca Fesq, vice president at Citi Cross Asset Group, suggests making a theoretical investment before committing your own cash.
Write down the shares you're thinking about and track their progress.
"Choose a realistic amount to invest, a time frame to watch your investment and the level of risk you'd be comfortable with if it were real money."
3. Start small
You need a minimum of $500 to start investing in shares, but Fesq says to aim for $2000, so brokerage fees don't eat away most of the profits.
Still, only invest an amount you're prepared to lose.
4. Embrace diversity
"Putting all you have into one investment is like betting on one horse in a race," says Luna.
"Diversifying your portfolio reduces your overall risk and can increase your overall return – think of it as spreading your bets across the field."
5. Think long-term
"The market goes up and down, but it's important that you don't panic the first time it dips," says Fesq.
Luna agrees, emphasising that investing is a medium- to long-term strategy. "Short-term investing, or day trading, is highly volatile and can burn you badly," she explains.
"Safe investing is about knowing how long you're in the market for, and playing accordingly."
6. Know when to quit
Managing risk involves knowing how far you're prepared to let your shares drop in value before calling it a day.
Brokers call this the stop loss, which is an order you place with them to sell stock when it falls to a certain price.
If you don't have a broker, decide in advance what your stop-loss price is, then stick to it.
"Set it at a percentage below your buy price," says Janine Cox, analyst at Wealth Within. "If it falls below this level, sell."
7. The head rules
Don't let emotions override common sense. "Loving a particular company's product doesn't mean it's a good investment," warns Fesq.
Investigate how companies are performing in the market by tracking their share prices.
8. Save online
You can open an account to start buying and selling shares on sites such as E-Trade.com.au.
"Online trading tends to be a bit cheaper than using a broker," says Fesq, "and most online brokers also provide a lot of good information."
9. Share alike
Consider starting an investment club with like-minded friends, says Fesq.
"Pick a time to meet regularly to discuss different investment options. This can be a good way to start and stay motivated."
10. Choose advisers carefully
"Backing a tip from a friend, colleague or acquaintance without researching it isn't investing," says Luna, "it's gambling."
Take advice only from reputable sources.
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