Investing in shares? Guiding points for beginners

So, you want to succeed in the stock market as an investor? Yes. Well, before you proceed, you need to map out your “action plan” for getting there, getting into the success you want to achieve. In this article, I will share a few suggestions for beginners and the less sophisticated potential investors on shares and/or portfolio management. I thought this might be relevant, who knows, probably for some of us among the 2019 resolutions is to start investing in the stock market.

The first thing to consider in deciding whether you are ready to invest in shares, bonds or unit trusts is to look at your current circumstances. Most of us have some form of investment goals, which are a good start, but we need to see if we can afford the investment required to realise our investment goals. In other words, you need to determine if you have the spare/surplus cash to make investments in shares.

To achieve the above objective, you need to construct your personal balance sheet and cash flows and seek answers to some important questions that will assist you to see where you stand.

For instance, only when you have paid off your short-term obligations and paid for all your important expenses and still you have income left-over (savings) should you consider investing in shares. Thus, the first thing you need to consider, is to settle your expenses and pay outstanding debts.

This is not necessarily a rule but it is a prudent advice because if you have debts that costs you say 15 per cent in interest expenses per annum and if you invest in shares, and your shares investment is growing at more than 15 per cent per annum and that, at some stage you can sell the share to repay the debts and still remain with some profits, you are then doing very well, but this is often difficult to achieve and thus it is advisable, or rather recommendable, for you to take a simple approach, which says invest your savings, do not borrow or get into debts trying to make an investment in shares – because the moment you do that, it amounts to speculation.

I know some retail/individual investors who in often cases take this approach during Initial Public Offerings (IPOs); where they borrow from banks with the speculative motives that after the IPO prices will go up and they will then be able to liquidate their investment shares, pay the debt and retain some profits.

So, the first step is to look at your current financial position, that is, your personal cash flows and balance sheet. Having done that, you then need to have a closer look at your attitude towards risk. This will help you see where you would like to be in the future.

So, what kind of things do you need to look at to see where you are now? Here are some points you need to consider:

Age and time remaining before retirement – how much time do you have to achieve your goals?

Occupation and employment status – do you have job security and a reliable income, or are you self-employed or a pensioner?

Standard of living – what are your ongoing requirements for an enjoyable standard of living, including personal belongings, holidays and luxury (entertainment) items? Are you comfortable now? Are you able to budget?

Family and dependents – do you wish to provide for your children and dependents’ education or for other needs?

Need for financial independence – do you have a strong need for financial independence and don’t wish to rely on a pension upon retirement? Note that Financial independence is achieved when you have enough wealth to live on without working – that is, financially independent people have assets that generate income that is at least equal to their expenses.

Control personal financies – how much control do you like to have in managing your financial situation?

Insurance – do you have adequate insurance against risks to your property, possessions, income and wellbeing?

I suggest you speak to a financial advisor/stockbrokers/fund manager to assess, i.e. if you do not have the objectivity or knowledge to do so.

Funding your share investment

If you’re going to invest money in shares, the first thing you need is, say with me: money! Where is that money going to come from. For many investors, re-allocating their investments and assets does the trick. Reallocating simply means selling some investments or other assets and reinvesting that money into shares.

It boils down to deciding what investment or asset you should sell. Generally, you want to consider those investments and assets that give you a low return on your money. Re-allocation is only part of the answer; your cash flow is the other part.

Your cash flow refers to what money is coming in (income) and what money is being spent (outflows). The result is either a positive cash flow or a negative cash flow, depending on your cash management skills. Maintaining positive cash flow helps to increase your net worth.

In the mix of it, it is important that you set the right expectations and learn what to expect from the stock market, learn to evaluate and analyze businesses that you intend to invest into.

Most of these information and data can be obtained from the companies’ published financial statements; also, company news and releases might assist.

Historical precedents and information related into it are also aspects to consider. Why? because in the stock market, history tends to repeat itself.