An idiots guide to investing on the stockmarket - part 3

I've not been posting for a long time, what with exams, novel writing and stuff, but now with an entire 13 months stretching melodiously ahead of me, I thought I'd write a proper little guide, an "idiots guide to investing on the stock market" if you will, which could actually be useful to someone out there. And if you get stuck about something I say, please don't hesitate in posting a question! I'll reply pretty promptly, seeing as though I'm on the computer editing my novel most days anyway.

Okay, the first few part of my guide can be found at my earlier posts, and the second one, starting to expound on how to choose stocks - here.

Before I start, I would just like to point out that I've been investing for roughly a year now, and been managing my own investment fund, which is in profit - so I do have some basic expertise. I correctly predicted the bottom of the recession in late summer, and predict a minor slump (or drawback if you will) in September, after which things will once again rise and get better...hopefully. 


Right, first of all, I would recommend a few simple steps to take before you embark on your dream of earning millions on the stock-market:

1. Start reading and watching business news, politics news, and international news VERY carefully. An investment opportunity lies behind pretty much every news story you can think of. "Stabbed boy dies - Hospital sued for negligence". There, we're looking at investing in a company that sells stab-proof vests, lawyer firms that specialise in NHS claims, and perhaps policing related investments (as the Government might make a knee-jerk announcement to increase police etc.) so a company that supplies the police force is going to be profitable. START THINKING LIKE THAT.

2. Buy a  few good books that give a basic overview of the stock-market. This one is a good one called "Investing in stocks and shares: a step-by-step guide": Investing In Stocks And Shares 6e: A step-by-step guide to making money on the stock market, and is the first book I read when i started, and it really is a treasure-trove of information. Then once you have read that, move onto books such as this: The Complete Idiot's Guide to Technical Analysis (Complete Idiot's Guides (Lifestyle Paperback)) This book goes into quite extensive detail about basic reading of a graph. Then once you have read that, read "The Truth About Markets by John Kay", and "Undercover Economist" by Tim Hartford,  which are an excellent - and light - general introduction to economics - which is the main discipline you have to understanding the stock-market. (Links to the books are in the sidebar.)


3. Buy the Financial Times a few times a week, and read their analysis, because its very useful to read the words of people who understand the markets much better than you and I, and it also helps with the whole MINDSET thing that I keep hammering on about.

4. Save up until you have £1000 to invest, or at least £500 - anything lower than this is just gambling  - unless of course you invest in a fund - but more about this later. Suffice for now to say that this is called "diversification of risk", which an incredibly cool title, and when you understand the concept, you too will become from amongst the cool and initiated.

5. Once you have a bit of an idea about what you're doing, register with a website that allows you to open a practise account, and trade with them for a bit, to really get your eye in and hone your skills a bit more. I use Share.com, and they do a practise account for free...so try that out. Alternatively, there's loads of other websites that offer the same facility.

6. To invest, you have three weapons: 1) a general knowledge of the market, economics, and the world, 2) a specific knowledge of the company you want to invest in i.e. is it in loads of debt? 3) technical analysis of the companies stock charts. Some people lean to one of the three, and I lean towards the third approach, rigorous technical analysis. To get your eye in for the whole graph-reading situation, I would advise that you spend about a month or so trading on this website. This site is actually for foreign-exchange trading (and that's a whole different kettle of fish) but the technical analysis is very heavy here, and the practise you get here can easily be carried across and applied to stock-market trading.

7. Finally...be enthusiastic about it all! No-one has ever fully understood the market, and no-one ever will, but people can slowly become competent over the years, and this is a long process that you are embarking upon. You will need energy and enthusiasm to continue. So if I were you, just like exercise trainers tell enthusiastic beginners, "don't do too much and burn out all your enthusiasm", because then you won't ever experience the thrill of calling a stock correctly and watching it rise.

In the next post I will explain that oh-so-cool concept of "diversification of risk", and why investing is a rich man's game.

My new trading book that takes you through money-making step-by-step:

http://economicsguide.blogspot.com/2010/05/why-i-wrote-trading-guide-to-sell-then.html

virtual trader review

I came across this neat little program that MSN have started offering:

https://secure.digitallook.com/cgi-bin/digitalcorporate/msn/home.cgi



Basically what this is, is that it offers you £100,000 start-up money and then you can trade real shares with realistic market conditions etc. Its an excellent way of enjoying all the excitement of playing the stock market, but without the money involved, which obviously could be good or bad depending on how good you are.


And basically they rate you on how much you gain on the 100000 in terms of your assets. And then you get put on a ranking table, on which I'm currently 27 (get in!), and for the 15-19 year old league I'm currently 3rd (GET IN!).


Finally to conclude the post here's a few tips I've picked up during my reading of "Investing in Stocks and Shares" by Dr. John Wright

• Decide on what you want from these stocks - if its long term growth then look at a company which has been growing in price steadily over the last few years, and that's pretty much most companies in the FTSE 100.
  
• Another thing to consider is the dividends, which is a share of the profits. This will be high for some companies and generally will accompany a high price.
  
• A good way to make money is to do some good research on undervalued companies which generally will be better conducted on less known stocks, which are less analysed and your looking at the AIM 350, FTSE 250 etc.
• Finally diversify the portfolio of shares into lots of different sectors. This alleviates the risk of one falling - as then the money from that sector will be invested in other sectors fueling a rise in another sector, so basically you don't lose. Interestingly if you invest in 10 sectors that alleviates 90% of the alpha risk which arises from investing in just one company. Investing in 20 alleviates 95% of the risk.

Finally I'll end with a little stock market axiom "The trend is your friend" - but in true stock market fashion it can also prove totally untrue.