10 golden rules of buying shares

Last updated: Mar 6th, 2013
Feature by Rob Griffin

Have you ever fancied dabbling in stocks and shares? Does the thought of making a small fortune trading on the stockmarket from the comfort of your armchair sound appealing?

If the answer to these questions is yes, then you're not alone. Around 12 million people in the UK own shares, and while not all of those count themselves as active day traders, the majority are hoping they can beat the professionals at their own game and earn bumper profits.

It's easy to see why sharedealing is so appealing. After all, you might decide to back a fledgling company in the early stages of its growth, then it suddenly takes off and becomes the next Microsoft, giving you stellar returns.

However, it is certainly not a guaranteed route to riches. The stockmarket can be a tough environment and there is always the possibility of losing all your money.

So how can you improve your chances of success and reduce the risk of losing your shirt? Moneywise has consulted the experts to come up with 10 golden rules of sharedealing to enable amateur investors to take their first steps.

1. KNOW WHAT YOU WANT TO ACHIEVE

The first task for any prospective investor is to be clear about what you are trying to achieve, says Richard Marwood, a senior fund manager at AXA Investment Management.

Successful sharedealing, he points out, is not just a case of picking a stock at random and selling it as soon as its value starts to rise.

"If you want to make 10 times your money, this will probably require more of a speculative situation than something you want to buy and hold, in order to gain long-term steady returns," he explains.

2. UNDERSTAND THE TYPE OF INVESTOR YOU ARE

It's also important to have an investment style that suits your personality, insists David Clark, manager of the Ignis UK Smaller Companies Fund.

"If you're very technically oriented then you might be interested in looking at lot of charts, but if you prefer to get under a company's skin then basic, good old-fashioned fundamental analysis would probably suit you better," he says.

"Investors need to decide which approach would make them feel most comfortable."

3. SET YOUR RISK BUDGET

No investment is completely risk-free. So, before you invest you'll need to decide how comfortable you are with the prospect of losing your money – even if it is only a short-term loss on the way to longer-term gains.

The definition of risk varies between investors. However, in its broadest sense, you'll need to consider the impact that losing all the money you have invested would have on your overall lifestyle. Only invest what you can afford to lose.

However, it's worth bearing in mind that although the value of your investment may go down, you will only make an actual loss if you cash in at that moment. Until then, it's only a paper loss and you still have the possibility of it eventually rising in value.

4. DIFFERENTIATE BETWEEN SMALL AND LARGE COMPANIES

There are pros and cons with both large and small companies. The big blue-chip names quoted on the main FTSE 100 index are seen to be steady and reliable, but the fact they are followed closely by thousands of analysts means the potential for them to surprise on the upside is limited.

Smaller companies, meanwhile, fly under the radar of many investment houses, so offer the potential for significant share price increases the market hadn't anticipated. However, by their very nature they are much riskier.

5. STAY IN YOUR COMFORT ZONE

When you're starting out it's best to stick with what you know. If you have particular knowledge of a company or sector, through your job for example, then put it to good use before exploring other avenues, says Clark.

"I'd strongly advise people not to run before they can walk, and only get themselves involved in areas where they have at least a degree of intuitive knowledge about the type of investments they are making."

6. DO YOUR RESEARCH

Whether you're thinking of buying or selling, it's critical to get a good understanding of the investment itself and what will affect its performance, says Nick Raynor, investment adviser at The Share Centre.

"Find out exactly what the company does and as much about its sector as you can," he advises. "While its annual report and balance sheet will provide you with statistics about recent performance, a good understanding of its position in the market will prove far more beneficial."

There's no shortage of information available to help you decide which companies to invest in, with numerous websites – for example, iii.co.uk and digitallook.com – newspapers and financial publications offering advice. However, you should always check the reliability of the source.

7. LEARN FROM THE EXPERTS

You might not have the same access to companies that fund managers enjoy, but you can learn from their approach. Alec Letchfield, head of UK Equities at HSBC Global Asset Management, looks for stocks that will rise over three or five years.

"We want companies that have good growth prospects and where the price is attractive, compared with their peers," he explains.

"There are many reasons for being optimistic about a particular company – for example, it may have a strong product that will have a positive impact on profits, there may be new management that will implement important beneficial changes, or it may be a growing industry."

You also need to take news flow into consideration. "World events do have an impact," Letchfield adds.

8. SPREAD YOUR RISK

Putting all of your money in one company can end up being a very good or a very bad decision – but either way it can be risky, suggests Richard Marwood at AXA.

One way to spread this risk is through diversification. "Spreading your money across a range of investments is a good way to reduce your exposure to market risk," says Raynor.

"This is because you're not relying on the returns of a single investment. With a diversified portfolio, returns from better-performing investments can help to offset those not doing so well."

9. DON'T FALL IN LOVE

It is important not to let your heart rule your head, warns Gordon Hay, managing director Redbourne Wealth Management.

"We have clients who are very passionate about a single company and want to invest all their money without having looked at it from an objective point of view," he says.

And you must be prepared to cut your losses if the reasons you bought the share have changed. Clark says: "Accept the fact you got it wrong – because it will happen. Don't worry about it; simply move on and learn from your mistake."

10. REVIEW YOUR PORTFOLIO AND TAKE PROFITS

You must review your investments regularly to ensure they continue to meet your needs. Keep up-to-date with company and market news, and ask yourself whether what you learn is likely to have an effect on your investment.

Should your chosen shares rise sharply in value it will be tempting to hold out for further increases, but be sensible, advises Hay.

"The golden rule in sharedealing is to take profits," he says. "I've seen too many people make huge paper profits, then the share price goes down and they're left regretting that they haven't banked even part of the profits. So skim profits off the top when you can."

Your Comments

Good informative and thought provoking

dr.Joy.K.Joseph