Practical Advice On Share Market Investing

Many people have a bad experience when investing in the stock market and never return. The best way to avoid such an experience is to never rely fully on tips you read about, or the advice of a stock broker, without also doing your own research.

Publications that operate as stock-picking tip sheets often have high credibility but are not infallible. Always evaluate the industries the companies operate in and do your own research as well as consider the writers’ recommendations. For instance, are you comfortable with investing in an industry like information technology or biotechnology if you do not understand either sector? Renowned investor, Warren Buffett, once said he never invested in any company he did not understand.

Stock brokers can give good advice but they are also out to make money for themselves through commissions. The more you trade the more commissions for the broker. Never automatically accept any recommendation your stock broker makes without considering the possibility of the brokerage receiving commissions from the company concerned for recommending the stock. This, in itself, does not mean that the company is not sound. However, the potential conflict of interest is obvious.

The one mechanism for knowing the true value of a company that every investor needs to understand is the price to earnings ratio (P-E). This is a tremendously powerful instrument in determining whether the company you invest in is under-valued or over-valued in terms of its trading position. The price to earnings ratio has the greatest effect on share price. In the case of a company earning 20c per share and trading on a P-E of 10 times, if this stock was to change to trading on a P-E of 20, its share price would be $4.00 not $2.00. As a result, the share price would have doubled in value despite earnings not increasing. The level of confidence in this company’s future is the only thing that would have changed.

While share market investing will always have its difficulties, and money can be lost as easily as made, there are few better ways to make money than the share market if a few important principles are followed:

1) Do not blindly follow investment trends just because everyone else is doing so;

2) Always understand the industry and company in which you plan to invest;

3) Always check for exposure to high debt levels and make sure the company is trading below its real value when purchasing its shares.

You should understand the cyclical nature of many industries. For instance, companies that produce bricks, cement, plaster boards, and steel are highly dependent on demand holding up in the building and manufacturing industries and are very prone to peaks and troughs. Similarly, mining companies require strength in the overall world economy to enable high demand for raw commodities such as iron ore, bauxite, coal, and zinc for example. Where as companies in transport and food-related industries tend to be less cyclical as demand is more consistent in those sectors.

In concluding, I would add that I have invested in the stock market over many years and have seen the cycles of high value and low value during those years. The most important factor in long-term success is to hold your nerve when all those around you are panicking. If the fundamentals are sound with the companies in your portfolio, there is every reason to believe that those companies can ride out a sudden collapse in the market.