You’ve probably heard of great stock market investors like Warren Buffett and George Soros. Maybe you’ve thought about investing yourself, and wondered whether trading the stock markets is for you. How easy is it to make money out of investing – and is it right for you?
What do you need to know?
If you want to be a good investor you’ll need to bone up on the basics. Concepts such as the price/earnings ratio and dividend yield are important, as is the ability to read a company’s annual report and get a feeling for the fundamentals affecting the company. You’ll also want to get acquainted with technical analysis, which will enable you to interpret share price charts and to analyse investor behaviour patterns.
Where can you get information?
There’s a lot of information available, but not all of it is equally good. Most companies now publish their earnings information and investor presentations on their websites, but analysts’ reports are often difficult to come by. Bloomberg, Reuters, and stock exchanges’ websites contain up to the minute news and statistics, while investment providers like CMC Markets provide both news and analysis as well as trading tools.
Probably the biggest single factor linking successful investors is their self-discipline. You’ll need to invest time and effort as well as money in the market to have any chance of making real profits. You’ll also need to be willing to go against the prevailing wisdom, and to take on board that things don’t always turn out as planned. If you want an easy life, or if you’re not willing to live with the worry of things going wrong, making a living from investment isn’t for you.
Successful traders always have a plan. For instance, you may decide that you can’t afford to risk more than 10 percent of your funds in a single investment. You might set a stop-loss level of 20 percent on any individual stock – stopping losses before they become really damaging. Having the self-discipline to stick to your plan is vital.
So how do I make money?
There are various ways of making money from investing, depending on how active an investor you are and how much risk you are willing to take. ‘Buy and hold‘ investors search out companies which are trading below their true value, and then hold the shares for the long term, selling only when the share price fully reflects the company’s prospects. Such investors can do well by spotting turnaround stories or early stage, fast growth companies, but generally ‘buy and hold’ is a slow and steady strategy that delivers moderate returns.
More active investors may consider online trading. This has a shorter time horizon – sometimes just hours – and can involve higher risks. It’s crucial to be able to calculate your total exposure and to be able to take fast decisions. Using options and other derivatives can also increase potential returns by ‘gearing up’, though the downside risks are higher too.
What about other markets?
As well as trading the stock market, you can trade bonds or currencies. You’ll still need to be able to interpret economic statistics and news, and you’ll need to keep an eye on the calendar for regular events like the Fed’s and Bank of England meetings, statistical releases, and Budget dates.
But… don’t I need capital to get started?
Of course you need some money to get started. But buy-and-hold investors often start out by putting regular monthly savings into their brokerage account, and using dividend reinvestment schemes to increase their holdings. Active traders often buy on margin – that is, they put down only a percentage of the value of their trades, effectively borrowing the rest from their broker.
Whichever style of investing you choose, don’t take the plunge without testing the water temperature first. Give yourself at least a couple of months to run a test portfolio or ‘trade’ without actually putting your money into the market. You’ll soon see whether you’re cut out to be a stock market tycoon – or whether you’re better off leaving it to a fund manager.