How to invest in stocks the right way

Content:

Investments on the stock exchange are associated with risk, and it is difficult to predict the rise or fall of individual securities. But risks can be managed if you know how to invest in stocks.

In this article, we told you why you need to invest on the stock exchange, how profitable it is, and what simple rules will help you make money on investments.

Is it worth investing in stocks

Stocks are one of the most highly profitable financial instruments. By buying them, you buy part of the company, which means you are entitled to a share of its profits. When earnings rise, the share price rises.

Why you need to invest:

• It’s a source of passive income. There are two ways to make a profit. The first is to buy shares, wait for them to rise in price, and sell. The second is to buy, not sell and receive dividends (part of the company’s profit, which it periodically distributes among the holders of its securities).

• Help to achieve financial goals. With regular investments in securities, you can save up to buy an apartment or a car, invest in education for children, and even provide yourself with a pension.

• Refusal to invest is a risk. He makes it impossible to increase his capital and reduces the value of savings due to the influence of inflation. For example, you had 100 thousand rubles that you kept at home. Every year, some of that money was eaten up by inflation. Over the past five years, inflation in Russia has amounted to 22%, which means that most prices have increased by this value. Now for 100 thousand rubles you can buy fewer goods than five years ago.

Is it profitable to invest in stocks

Stocks earn tens of percent a year. This is how much you would have received if you had invested in these companies a year ago. For comparison, if you put money in a bank, you can only earn 5-6% (this is the average annual rate on a bank deposit).

How much to invest in stocks

You don’t need a lot of savings to get started. Enough 2-3 thousand rubles. True, it will not work to collect a good investment portfolio – it is better to allocate from 50 to 100 thousand. This allows you to buy securities of several companies and thereby reduce risks and increase the efficiency of investments.

How to invest in stocks the right way

To understand how to invest in stocks, protect yourself from risks and avoid mistakes that beginner investors make, follow these rules.

1. Determine your risk tolerance

There are two main asset classes in investing – stocks and bonds. In the long run, returns on stocks are higher than on bonds. But stocks are riskier. In moments of crisis, the stock market can sink by 40–50%, and recovery can take several years.

If your investment portfolio is 100% stock, a 50% decline in the stock market will halve your portfolio size. If this share in the portfolio is 50%, the portfolio will decrease by 25%. If only 20% – you will lose 10%. Think about how much recession you can handle with ease.

2. Set a goal and a deadline

Determine why you are investing and how much money you need to reach your goal. Set the period for which you want to collect the amount.

Understanding the purpose helps you choose the right assets for your needs. The longer the term, the more you can invest in stocks. Even if the stock market drops, you will have time to win back the fall. As the goal gets closer, reduce the number of stocks and increase the share of bonds.

3. Distribute investments among shares of different companies

This is one of the main rules that helps to learn how to invest in stocks correctly. Invest in Russian and foreign companies from different industries – this will reduce the risk of loss of profitability. An effective investment portfolio consists of 10-14 companies in equal shares. If one of the shares starts to fall in price, the others compensate for the losses due to their growth.

When an investor invests 100% of his money in only one industry, for example, in Russian oil companies, he takes on a lot of risks. The oil sector in Russia is sensitive to foreign sanctions, the level of exports, and OPEC agreements. Any negative scenario will directly affect such a portfolio.

4. Buy not only stocks, but also bonds

The general rule is that the more shares in the portfolio, the greater the risk, and vice versa. To protect yourself, send some of the money to bonds – less profitable, but more reliable securities. If you are not at all ready to take risks, form the basis of the portfolio from them (80-90% of the total composition of the portfolio). Also, part of the money can be directed to the purchase of currency in order to diversify assets even more.

5. Invest for the long term

Buy securities for the long term (from 3-5 years). This approach protects against market shocks, because in the long run the market is always growing. Recessions after crises are replaced by growth.

For instance, MOEX index, which includes about 50 of the largest Russian companies, after the global crisis in 2008, after three years, won back the fall by 3.6 times (from 513 to 1859 points). And in September 2021, the index reached a value of 4058 points.

6. Look at the blue chips

Blue chips are shares of the largest and most stable stock market companies that regularly pay dividends.

Examples of Russian blue chips:

US blue chip examples:

These companies are good because they grow because of fundamental business processes, and not because of speculation or news hype. They do not rise sharply in price, but they confidently survive crises thanks to their reserves and show growth in the long term.

7. Don’t gamble

Do not play on the course of rising or falling prices. This is done by professional traders who spend their entire working day on speculation. More frequent trading increases the commissions for transactions that the brokerage company charges. Better stick to a buy and hold strategy.

8. Rebalance your portfolio

Rebalancing is the restoration of the original proportions of the portfolio. For example, an investor collected a portfolio of stocks and bonds and divided his investments between them 50/50. Over time, stocks grew, their share in the portfolio increased from 50% to 65%, and bonds decreased to 35%. The portfolio has become more risky.

Then the investor makes a rebalancing: he sells part of the shares or deposits money and buys more bonds, restoring the 50/50 ratio.

Rebalancing does not need to be done often, once every six months or a year is enough, if the share of the asset has changed by more than 5% from the original one.

9. Treat stocks as a source of passive income

Don’t look at stocks as a get rich quick option. Investments are a way to passively earn money and protect money from inflation.

Where to invest in stocks

Shares are sold on stock exchanges – platforms that organize trading in securities. There are two main platforms in Russia – the Moscow Exchange and the St. Petersburg Exchange. On the first one, Russian securities are traded. On the second – foreign.

True, you can not buy them directly on the exchange. This can only be done through a brokerage company (broker) – a professional intermediary who registers a novice investor on the stock exchange and executes his orders for transactions. For example, “Buy ten shares of Lukoil” or “Sell five shares of Intel.”

To start working with a broker, you need to open a brokerage account. It is needed to account for the investor’s income. Before buying securities, money is brought there, and after they are sold, profits are withdrawn to it. Dividend payments are also automatically received on the brokerage account.

How to buy shares remotely

You can buy through the online showcase of securities. The whole procedure takes place online, and you can track the status of assets through a special personal account.

• Go to the company card, for example, “Gazprom” and click on the “Buy” button.

• Fill out an application for a brokerage account. It is issued free of charge through the Tinkoff Investments broker. For this you need a passport.

• When the account is ready, the broker will give you access to your personal account and mobile application where you can start trading. Before that, replenish your account with a bank card.

• For each transaction, the broker takes a commission (from 0.025% of the total transaction amount).

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Read: How to properly diversify your portfolio