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Do’s and Don’ts of Investing in Shares
Investing on the JSE can be a rewarding and self fulfilling experience for the investor or turn out to be the worst nightmare, if guidance is not properly offered.
These guidelines serve as compass that attempts to point investors to tried and tested principles of investing. The do’s of investing include the following:
Diversification- The expression, “don’t put all your eggs in one basket” is meaningful when it comes to investing. A portfolio/basket of shares should contain different shares from different sectors so that the losses from some shares can be offset by gain from the others.
Do you homework: Obtain and analyze as much information as possible about the company or the investment concerned. This will alert you of any problems a company might have or what to expect from the investment. Your stockbroker will come in handy in this regard.
Set goals & limits: determine the investment objective and the price (high target price or stop loss price) at which you are willing to sell . This will assist you to know when to sell.
Costs of investing: Unlike in the past, brokers are allowed to fix their own brokerage rates. It is important to understand the rates your broker charges before they go into the market on your behalf. Brokerage is calculated on a sliding scale - the larger the transaction the less the brokerage. In addition to stockbroker’s fees, there are other relevant taxes that are associated with trading shares. It is advisable to always check and understand the costs of investing on the JSE. There are stockbroker’s fees and other relevant taxes that are associated with trading shares.
Invest for the long term: shares by their nature are medium to long term investments, meaning that share prices might fluctuate in the short term, but generally offer inflation adjusted returns in the long run.
Use “Can I sleep judgment”: Despite the JSE's proven rate of inflation-beating returns in the long term, share investment is considered high risk by its nature. It carries an element of risk because companies can fail, markets can collapse, and prices can plummet as much as they can soar. Before you venture into the market, take careful stock of your means and motives. Also, look at your personal risk profile - how much can you safely afford to lose in the event of a stock market crash or correction? How long will you be prepared to wait for the market to recover if and after taking dive, and will you have the courage and foresight to continue investing when prices are at their lowest ebb? Your honest answers will determine the extent of your capacity to balance risk with reward.
Get Professional Help: your stockbroker is your point of departure in matters such the provision of investment advice, research reports, tax planning, etc.
There are some practices that you should avoid when making investment decisions to minimise the risk of making a loss.
- Do not borrow to invest; you should not take other people’s money (loan) or money from you credit card.
- Be wary of get rich quick schemes, investing in shares is not a get rich quick scheme.
- Do not invest on tips and rumours, always stick to your investment strategy.
- Do not invest in high risk investments, unless you are ready for it e.g. futures trading. Always ask for the riskyness of the investment before investing.
- Never invest in shares if you don’t know how a company earns its profits, (profit drivers.
- Don’t be emotionally attached to your shares.
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