Picking winners in the share market can be complicated and mistakes can be costly, education can avoid a lot of the pitfalls. Shares have the potential to earn you a good return but there is always risk, no magic formula exists for making money from shares it involves work, patience and knowledge. So if you’re OK with that read on.
You work hard for your money; it’s time to get your money to work even harder for you.
Of course there are lots of different share market strategies, what you do depends on what suits you and how much you can invest in time, money and education. It is important that you have some knowledge and understanding of the strategies you choose so at least some education is necessary in each. Let’s for a moment talk about long term strategy, five years or so. Before you get started its a good idea to learn a bit about what drives the market, you want to know that you are investing in a good company.
To work out what a good company is requires some homework, gathering information about the company must be on the top of your list before you decide to invest. Remember buying shares means you are a part owner in that company take your role seriously and know what you are contributing your money to. Don’t just think it’s an easy way to make money, that attitude is extremely risky.
Keep accurate records and files of company releases and media stories, make notes on why you are investing in that particular company, review regularly, about every three months is good. The nature of the share market means it can rise and fall daily, don’t panic if the price of your shares drop be patient. If you did your homework and all the factors you based your decision on when you purchased the shares are still accurate the prices will rise again.
You do obviously have to sell at some time in order to realize your profits, make your decision and sell. Taking your time to purchase is necessary but once you’ve decided to sell, just do it. Always keep you’re goals in sight, you had a reason for investing keep that in mind along the way don’t try and out do yourself because that’s when things can come undone. If your goals have changed then reassess the whole situation before you act on impulse.
What risk can you afford to carry? A wise investor will balance their risk by investing in various sectors of the market. A portfolio of an average of eight good stocks across the different market sectors is a good place to start. Invest wisely so that you don’t lose more than you can afford. Things can always change; we can’t control a lot of what goes on in the market so even if you have done your home work, and put your money into good companies, don’t put yourself in a position that you could lose more than you can afford.
Two terms you will have to get used to if you are going to invest in the share market are dividend yield and price/earnings (P/E) ratio. They are tools that will help you decide a companies worth or value.
A dividend is what a company pays out to its shareholders. It is shown as a percentage and represents the value of the annual dividend against the current share price. For example if you bought shares at $10.00 each and received an annual divided of 0.50c per share than your dividend yield would be 5%.
The P/E ratio represents the profit, after tax, a company makes on each share it issues in other words the measure of how expensive a stock is. If a company’s stock is $10.00 and it’s earnings per share is $2.00 the P/E ration is 5. The higher the P/E ratio the higher the market is willing to pay for each dollar of annual earnings. Higher P/E ratios can be risky because expectations are higher.
Picking a winner in the share market definitely involves some work on your part, learning some terms, doing company research, educating yourself and being diligent. The market will rise and fall it’s the way the game is played, but if it is an investment strategy you are interested in then obviously how you play and how much you understand the rules are vital if you want to win.
