Five handy tips to bear in mind before investing in stocks

You are watching local and regional economies stage strong rebounds following one of the worst global recessions ever and you stand witness to the wealth that is being generated by many along the way.

Unfortunately, your limited capital does not allow you to venture into big investments such as those in real estate, nor is it easy to invest in start-up ventures which carry significant risks. And so you feel disappointed and somewhat restless as to how you can participate and benefit from the strong recovery that you so clearly see in almost every sector in the economy.

Well, do not give up just yet. A great way to get exposure and benefit from the boom is buying into existing companies that are already taking advantage of the strong pickup in business growth across various industries. And what better or easier way to do that than by buying stocks of well-known publicly listed and traded companies in the stock market? For average retail investors with limited capital, buying stocks is probably the easiest way to participate in the recovery.

The low cost and flexibility in trading shares of listed companies make it feasible for the small guy to play along and benefit from the returning boom in the market.

Still, as with any investment, trading and investing in the stock market can be dangerous if one fails to understand the risks entailed.

Here, are five steps to keep in mind before you invest in stocks:

1. Understand the basics of the stock market

It is imperative that you familiarise yourself with the stock market and how it works before considering buying stocks. Understanding the basics of what a stock represents and how the stock market functions and who the main participants are is essential.

Effectively, a stock represents ownership in a company and it is traded freely on the stock exchange, which is the authority that governs the buying and selling of stocks.

The price of a stock is primarily determined by demand and supply (buyers and sellers), as is the case with any freely traded commodity in the world.

Much of the basic information you need about what a stock market is and how it functions can be found for free online, and there are affordable online courses that can help you understand all the basics in even greater detail and put you on the right path.

2. Open a brokerage account

To buy stocks in any market, you have to have an account opened with one of the registered and designated brokers in the country.

You can think of the broker as the middleman that connects buyers and sellers for a very small fee. In this day and age, opening a brokerage account is very easy. It is probably easier than opening a bank account and you should be able to do it online.

3. Determine your investment goal

It is important you have a clear idea of the expected return and the time frame of your investments. Many jump into the market, buying stocks on tips and rumours with no entry and exit strategy and hardly any plan to limit any exposure to excessive risk.

Do not be blinded by the big stock market gains you hear about in public, and make sure you are clear on the reward potential of your investment as well as the risk threshold you can tolerate before you decide to buy stocks.

Also, be clear on how long you are capable and willing to hold the stock for before you can cash in on the gains, or even exit at a loss should the investment go against the plan.

4. Research the market for the stocks that fit your investment criteria

This is easier said than done and if you are a beginner, it will probably be very difficult to go through this exercise on your own.

Luckily, there are plenty of stock-research providers than can help you make an informed decision for a small fee. In fact, many of the brokerage houses provide their clients with research on a large number of stocks for free.

That is how they usually compete for business.

5. Fund your account and start trading

You can always set up a practice account trading virtual money, but this will only help you get a feel for trading. Trading fake money will hardly train you to deal with the emotions you experience when you have real money at risk.

Always start with a very small investment and never risk big amounts in the early stages. One of the most important things in trading is to have a clear entry and exit strategy and to stay disciplined enough to stick to the plan.

Adel Merheb is the managing partner of Tradeyourmarket.com

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