5 tips for prospective investors

Given its gains over the last 12 months, the stock market is tempting, but it carries risks. Use these tips to aid you along your investing journey.

The strength and resilience shown on the share market over the last 12 months or so makes it tempting to many people who have either never owned shares, or who owned shares at some stage prior to or during the global financial crisis.

We have seen the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) surge since around June last year, with numerous companies giving investors some enormous returns. The big four banks, supermarket giants Wesfarmers (ASX: WES) and Woolworths (ASX: WOW) and even Telstra (ASX: TLS) have all increased substantially in value due to their defensive nature and high dividend offerings.

Meanwhile, at the smaller end of the spectrum, companies such as Mortgage Choice (ASX: MOC) or Jumbo Interactive (ASX: JIN) have almost doubled in value over the last 12 months.

This has understandably reignited much interest from people who have had their money invested in term deposits or in savings accounts. However, before simply ‘diving in’ to the share market and testing your luck, here are a number of helpful tips that could assist you on your investing journey:

  • First, it is important to understand the company or the sector in which you are investing. This will help you to gain a better understanding of the risks involved as well as their potential and will help you sleep easier at night, knowing that you can trust the business.
  • Invest for the long-term. Ignore short-term market fluctuations and plan to realise the gains over a period of (hopefully) 5-10 years. Any gains realised after a year of holding also carry a capital gains tax incentive. Meanwhile, significant brokerage fees can be saved by not constantly buying and selling.
  • Diversification is a must. Stocks are a risky investment class and things can go wrong with even the most promising stocks (or sectors, for that matter). Build your portfolio over time but aim to hold a variety of stocks from different sectors (or even foreign companies).
  • If you’re unsure about the current price of a company, you can drip-feed money into the investment over time. For instance, if a stock is priced at $10.00 a share, you could invest a certain amount of money, and then put more money into the company if it fell to $9.00. Avoid doing this with small amounts of money or too regularly however, as brokerage fees will also add up.
  • Try to ignore past share movements. If a very well-run company is currently trading at its highest 52-week level, don’t wait for it to come down – that may never happen. If you trust the investment and that it will deliver good long-term returns, then invest for its future, not for its past.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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