Five things to remember when investing in stocks

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You don’t have to be Warren Buffett or a big wolf of Wall Street to build and benefit from an equity portfolio.

Stock market investing is open to anyone with a little money to put aside for the future.

Here are some tips for investing in stocks.

Investing in stocks allows you to take a stake in some of the biggest brands in the world

Investing in stocks allows you to take a stake in some of the biggest brands in the world such as Apple, Starbucks and Netflix, or in companies that you may know closer to home, such as Asos, Tesco or Rightmove.

You may also think you’ve spotted the next big thing and are investing some money in smaller, listed companies that might be poised to grow.

Sam North of eToro Academy, a place that offers free resources, webinars, and courses to help investors get the most from their portfolio, reveals what you need to know to build an equity portfolio long-term.

Make a plan

Knowing why you are investing in stocks and what you are investing for can help you choose which companies to support in your portfolio.

Reasons for investing could include setting aside money for a mortgage deposit to support your children or for your retirement.

These goals create different time horizons within your portfolio.

Expert: Sam North, from the eToro Academy

Expert: Sam North, from the eToro Academy

Saving for a mortgage deposit will be a shorter term goal over a few years compared to building up a retirement pot, which can be invested over decades.

There may be stocks that you are happy to support for short-term returns to give your portfolio a boost, while others could be more reliable stocks that won’t necessarily rise quickly, but will deliver. a regular payment to shareholders known as a dividend. .

Mr North said: “There will be investments that I think are a long-term game and I have no intention of taking out of my portfolio.

“There may be an S&P 500 exchange-traded fund tracker that I add throughout the year with the intention of keeping it until I retire.

“On the other hand, some investments will be much shorter term. For example, I might have invested in foreclosure stocks that performed well in mid to late 2020 like Zoom, but once the world started to open up again I would look to invest elsewhere and it would make less sense to keep one action that will not work as well as the others. ‘

Research

Knowing why you are investing is just the start and you should also understand what you are investing in.

This can help you make decisions about the best businesses to buy, and when to sell or increase your stake.

There are different ways to measure the performance of an action. You can look at a company’s stock price over a period of time, but remember that past performance is no guarantee of future returns.

Rather, experts emphasize the “fundamentals” of a business, namely its financial strength, such as its earnings, cash flow and balance sheet.

Make sure you do your research on the companies you invest in

Make sure you do your research on the companies you invest in

A business with steady profits and a lot of money can be a good sign, but there can also be warning signs to watch out for when it comes to the sustainability of a business’s returns.

It is also important to understand economic and political events that may affect the stocks in your portfolio, such as tax or regulatory changes.

Other financial measures include the price / earnings ratio, which is a company’s share price divided by earnings per share. This is to be compared with other companies in the same sector.

A high ratio might suggest that the company is ready for growth – and therefore highly regarded by investors – but it can also mean that it is overvalued if it is well above its competition. Likewise, a company may appear undervalued if its ratio is lower than that of its competitors.

Mr. North said he would start by looking at the macro environment and identify the main drivers.

He adds, “There may be some areas that I prefer next based on my views for the next six to 12 months, and I’ll pick about five stocks that fall into that category to help diversify.

“Then I look at the charts from a risk / reward perspective and see what the potential returns could be based on technical analysis. If I like what I see, I’ll take a look at the fundamentals of the business and that might involve recent earnings reports and balance sheets. ‘

He says there is no magic metric to value a stock, but says a common rule of thumb is that investors stay consistent with their approach.

To diversify

Investing in stocks is risky, it is possible that stock prices will go down and your portfolio will end up being worth less than the money you invested in it. Research shows that the longer you hold a large basket of stocks, the less fall.

Some companies can be more volatile than others, and their stock prices can rise one day and drop dramatically the next. This will affect the value of your wallet.

But you can reduce and spread the amount of risk you take through diversification.

It means spreading your money over different stocks so that you invest in companies from various industries and countries.

If you build a portfolio that is too focused on one area such as technology stocks, the value of your investments could drop if the entire industry is hit by bad news, for example if there is uncertainty about new regulations.

Reduce and spread the level of risk you take by diversifying your investments

Reduce and spread the level of risk you take by diversifying your investments

Investing in different types of companies means that other stocks can take over if part of your portfolio is doing poorly, which should mitigate losses over time.

Mr. North adds, “You can diversify by investing in different industries, geographies and companies.

“It is worth investing in stocks, bonds, commodities, exchange traded funds and mutual funds and considering some investments with varying risks.”

He suggests holding between 20 and 30 stocks in your portfolio, but says that can change depending on the economic environment.

The power of composition

You don’t need a lot of money to start investing in stocks. Even just £ 100 per month will give you £ 1,200 per year to work on the stock market.

Your money can also benefit from a market effect called capitalization.

Any earnings you make in one year will be added to the earnings for the following year. During this time, any dividend payments you receive can be reinvested to buy more shares, thus increasing the dividends you will get in the future.

For example, if you have a portfolio of £ 1,000 and it grows 5% in one year, it will have grown to £ 1,050, or a profit of £ 50. If the same 5% growth occurs the following year, it will now be over £ 1,050 and you will earn £ 52.50.

The power of compounding, by making gains over earnings, can be a major driver of long-term wealth.

Do not panic !

Time spent in the market is more important than timing of the market, which is notoriously difficult to do.

It can be tempting to panic if your portfolio takes a drastic drop.

Stock values ​​fell amid the uncertainty of the coronavirus outbreak in March 2020, but there was a rally at the end of the year and markets broadly recovered. Investors who bailed out after the initial declines would have missed this rally if they had sold when their stocks were down.

Mr. North says: “I am convinced that larger stock markets are designed to rise over the long term, and historically, buying a 10% correction has been proven to lead to successful returns.

“My personal way of investing is to identify a price for a certain asset where I think I’m no longer right and the market doesn’t agree with me.

“As long as the price stays above, I don’t mind if a stock is losing value. Amazon has seen many periods where it has fallen over 30% and globally increased by several thousand percent. Be patient.’

When it comes to investing in stocks, one of the most important things you can equip yourself with is knowledge. The eToro Academy is a free resource with courses, webinars, podcasts and guides to read that aims to make investing learning accessible to everyone.

Learn more about investing, for free with the eToro Academy here.

This communication is for informational and educational purposes only and should not be construed as investment advice, personal recommendation or an offer or solicitation to buy or sell financial instruments. This document has been prepared without taking into account the investment objectives or the financial situation of a particular recipient, and has not been prepared in accordance with legal and regulatory requirements intended to promote independent research. Any reference to the past or future performance of a financial instrument, index or packaged investment product is not and should not be considered as a reliable indicator of future results. eToro makes no representations and assumes no responsibility for the accuracy or completeness of the content of this publication.

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