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Stocks are one of the most profitable investment vehicles. Unlike a bank deposit with an average rate of 4-5% per annum, they can earn tens of percent per year, and long-term shares provide a constant passive income. To start trading stocks on the stock exchange, you do not need to have a financial education or a lot of money.
How to trade stocks
To understand how to trade stocks the right way, check out these simple tips. They will help you avoid common mistakes in investments and protect your money from market risks.
1. Define your attitude to risk
The more the investor risks, the higher the return he can receive. This is called the risk premium. According to the degree of risk, investors are of three types – conservative, rational and aggressive. The first react sharply even to a small loss, while the third do not panic during recessions and price fluctuations. They are willing to take risks for high returns.
Determine your risk tolerance. Imagine what would happen if your investment portfolio depreciated by 20%, 30% or 40%. Will you be able to calmly survive the drawdown or sell assets.
2. Start stock picking
The more risk you are willing to take, the more you can invest in growth stocks – “growth stocks”. Usually these are companies that are engaged in alternative energy, IT technologies, biopharmaceuticals, and the production of unmanned vehicles.
Such stocks can rise sharply in price, but they are highly dependent on market conditions, news events and the general mood of investors. Examples: Tesla, Amazon, Facebook, Yandex, Mail Group.
If you do not want to take risks, choose blue chips – the largest companies in the market. Their business is crisis resistant. Blue chip prices do not rise as much as growth stock prices, but increase over the long term. Company examples: Gazprom, Sberbank, Rosneft, Coca-Cola, McDonald’s, Procter & Gamble.
3. Start small
It is not necessary to immediately invest large sums. To find out how the process of buying securities goes, take a closer look at low-cost stocks. There are many well-known companies on the stock exchange whose securities cost less than 2-3 thousand rubles, for example, VTB, Tatneft, M Video, Aeroflot, RusHydro, Severstal, Gazprom.
4. Distribute money
For investments, choose 12-15 companies from different economic sectors. Two or three companies per industry. This is necessary to spread the risks. Even if a global economic crisis breaks out, all industries will not collapse at once. Growth in some industries will compensate for the decline in others.
Industry examples:
- Information Technology
- mechanical engineering
- The property
- Consumer goods and services
- raw materials industry
- Telecommunications
- Finance
- Power industry
- Oil and gas
- Green energy.
In addition, do not stop only at promotions. To protect yourself even more, buy bonds. They are more reliable, but not more profitable than stocks. The higher the proportion of bonds in the portfolio, the lower the level of risk. Distribution is one of the main rules that helps you understand how to trade stocks and not lose money.
5. Divide the budget between promotions equally
Try to keep the companies in your portfolio in equal proportions. You should not invest 50% of the entire budget in one company, and divide the remaining 50% among others. If there are 12 companies in the portfolio, the share of the budget for each of them should be about 8-10%.
6. Invest for the long term
Long-term investors who invest for a period of three years or more do not give in to emotions during market shocks. They calmly survive all the downturns, continuing to hold shares. If an investor sells securities during a crisis, he will fix the loss and will not give prices a chance to recover.
Historically, the market always overcomes recessions and continues to grow. For example, after the maximum decline in March 2020 due to COVID-19, the US and Russian stock markets recovered by the end of the year.
7. Invest Monthly
Increase capital by purchasing additional assets every month. To do this, determine a comfortable amount for yourself, which can be spent monthly on the purchase of shares or bonds. At the same time, do not invest all your savings, leaving yourself without money for basic expenses.
8. Don’t try to beat the market
Don’t treat investing like playing the lottery, trying to beat market returns. An investor who speculates on the rise and fall of the stock price earns less in the long run, in contrast to the investor who adheres to the “buy and hold” strategy.
9. Choose a broker and register on the exchange
Before trading stocks on the stock exchange, you need to choose a brokerage company. Because a private investor can invest money on the exchange only through a broker – a legal entity that has a license for brokerage. You can’t trade stocks without a broker.
The broker opens a brokerage account for the investor, where all transactions and assets of the investor are taken into account. To issue an account, fill out a short application, indicate your contacts and passport details. Everything is exactly the same as when opening a simple bank account.
Broker – investor’s hands on the stock exchange. After opening an account, he gives access to a personal account, where the investor looks at all the statistics on the shares of different companies, buys or sells them.
Deposit money into your account with a card, find the stocks you need in the catalog and make a purchase order. The broker will transfer the money into securities, and you will become their owner.
According to the Moscow Exchange, there are eighteen brokerage companies in Russia that have registered more than 30,000 clients on the exchange.
The larger the broker, the more reliable it is. The largest in terms of the number of clients in the Russian Federation is Tinkoff Investments. About 6 million people trade through it. Open an account with Tinkoff possible remotely.
10. Follow the market
Once you’ve learned how to trade stocks wisely, keep looking for new ways to invest. Investment ideas from brokerage analysts help with this. Brokers usually publish ideas on their websites. For example, at Tinkoff Investments they are placed in the “What to buy” section.
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