Anyone who wants to invest in the stock market must first be clear about what type of investor they are. Investors who invest a large part of their capital in stocks are considered to be more willing to take risks or even more speculative. The risk can be reduced through conscious risk management.
“Never put all your eggs in one basket”
So that the investment success does not depend on the fluctuations of a few individual stocks, a balanced diversification of the capital makes sense. However, when it comes to diversification, it is important to find the right balance in order to avoid losing the overview due to excessive capital diversification. For an investor with a long-term perspective, it is therefore advisable to equip his portfolio with ten to twenty values.
It is also advisable to invest in different industries, countries, etc. For example, investments in the so-called emerging markets tend to fluctuate more strongly than stocks from industrialized countries. Equities from the technology sector also fluctuate more strongly than stocks from the food and beverages sector. This results in both higher risks and higher chances of winning. As a rule, it is also important how big the company is and how well established it is in the market.
Because of this wide range of risk and return opportunities, stock buyers have to worry about the extent to which they are willing to take risks. For those new to the stock market, given their lack of experience, it may make sense to start with more conservative stocks and preferably choose blue-chip stocks. This is the name given to stocks that are among the world’s most important leading indices such as DAX , Dow Jones 30 , Nikkei 225 or EURO STOXX 50 . Because don’t forget: In extreme cases, there is a risk of total loss of the capital invested!
to gather information
In order to select the right individual titles, it is important to find out about the companies in question – for example on the company’s websites or on financial portals. In addition, buy and sell recommendations from well-known analyst firms can also serve as a decision-making aid.
If you are particularly familiar with a certain industry, for example from your own professional experience, it of course makes sense to look around here for a worthwhile purchase candidate. It is important that you feel comfortable with your equity investment, i.e. invest in companies, industries and regions whose future opportunities you are convinced of.
The two sources of income from a share
An important decision criterion is of course the expected return and thus the two sources of income for a share: dividends and price gains. However, it should not be forgotten that neither is guaranteed.
Corporations usually pursue a longer-term dividend strategy, which they also communicate. In order to be able to offer an almost constant dividend over a longer period of time, the profit is not distributed in full in good financial years, but is partly transferred to the reserves. These reserves can then be used in lean years in order to be able to pay out the usual dividend. The companies want to present themselves as an attractive investment, which makes it easier for them to find equity investors – i.e. shareholders.
The dividend can be understood as a signal for the future prospects of a group. Dividend increases are an indication of a good level of cash and the trust of the board of directors in future business development. If the dividend is cut, the effect is reversed accordingly.
In the current phase of low interest rates, stocks with high dividends are certainly an attractive investment option. For stockholders, however, the prospect of price increases is usually more interesting than profit sharing, as the price development enables higher returns. The price / earnings ratio is one of the most important benchmarks for this. Probably the best-known fundamental key figure indicates the relationship between the profit of a stock corporation and the current market value. To do this, the stock market price is divided by the earnings per share. A share with a low P / E ratio is valued as cheap. For an accurate assessment, however, the calculated value should also be compared with the P / E industry average.
Practice without risk
In order to carefully sniff the stock market, it is advisable for newcomers to first complete a dry run. With the help of a model portfolio, you can gain experience on the stock market without investing real money.
This post is the first published on citytelegraph.com