Shares: Time To Invest?

There is no perfect time to invest in shares. It is a common dilemma for investors, but the simple answer is that there is no ideal time to start investing. Instead, it is about spending as much time as possible in the market and investing for the long term.

The best time to invest in stocks is when you have the financial security and time to leave your money invested for at least five years. This is because investments can rise and fall in value, and historical data shows that markets tend to climb over time. By giving yourself a longer time horizon, you can ride out the short-term fluctuations and walk away with a profit.

It is also important to understand how the stock market works, have the funds to invest, know the process and costs of investing, and be aware of your risk tolerance and financial goals.

Understanding how the stock market works

The stock market is a network of exchanges where investors buy and sell shares of companies. It's a way for companies to raise capital by selling shares of stock to investors, who then become shareholders with voting rights and a claim on corporate earnings. The stock market provides a venue for individual and institutional investors to come together and trade shares in a public market.

When you buy a share of stock on the stock market, you are buying it from an existing shareholder, not the company itself. Similarly, when you sell a stock, you are selling it to another investor, not back to the company.

The price of shares is set by supply and demand, with buyers and sellers placing orders. Share prices fluctuate as investors and traders assess and reassess the intrinsic value of a company.

The stock market provides a place for anyone to buy and sell fractional ownership in a publicly traded company. It also allows companies to raise capital to grow their business.

There are two main ways to make money in the stock market: through capital gains and dividends. Capital gains are made when you sell a stock for more than you paid for it. Dividends are payments made by companies to shareholders from their profits.

The most significant downside is that you can lose your entire investment if the stock price falls to zero. Stock investing can be an emotional rollercoaster, and fees and fraud are also concerns.

You can buy stocks online through a brokerage account or an individual retirement account (IRA). Online brokerages have made it easy to sign up and start investing.

For intraday traders, the best time of day to trade is between 9:30 and 10:30 am. This is because the first 90 minutes of the trading day are when volatility and volume drop, and seasoned traders are looking to manipulate rates.

There are two main types of stock: common shares and preferred shares. Common shares usually carry voting rights, while preferred shares generally do not but have priority when it comes to receiving dividends and assets in the event of liquidation.

A stock exchange is a secondary market where existing shareholders can transact with potential buyers. The largest stock exchanges in the world include the New York Stock Exchange (NYSE) and Nasdaq.

A stock market index is an aggregated representation of the prices of several different stocks, with the movement of the index being the net effect of the movements of each component stock. Examples of stock market indexes include the Dow Jones Industrial Average (DJIA) and the S&P 500.

Knowing the process and costs of investing

The Process of Investing in Shares:

• Understanding the Basics: Before investing, it's important to learn about how the stock market works, including factors that influence stock prices, different types of stocks, sectors, and market capitalizations, and various investment strategies.
• Creating a Budget: Ensure your essential costs are covered, set up an emergency fund, and then allocate funds specifically for investments.
• Choosing the Right Accounts: To invest in shares, you typically need a Demat account, a trading account, and a bank account. Familiarize yourself with the process of opening these accounts and ensure you have the necessary documents.
• Know Your Investor Profile: Understand your financial goals, risk tolerance, and investment horizon. Are you investing for retirement, saving for a house, or planning for your child's education? Knowing your goals will help you tailor your investment strategy.
• Trading vs. Investing: Decide whether you want to engage in short-term trading or long-term investing. Trading requires a deeper understanding of market movements and the ability to interpret charts and graphs. Investing, on the other hand, is a longer-term strategy.

The Costs of Investing in Shares:

• Brokerage Fees: Brokerage companies often charge a trade commission for buying or selling stocks, which includes costs for routing, executing, and clearing the trade. These fees vary across brokers.
• Expense Ratios: Mutual funds, one of the most common investment instruments, charge an expense ratio, which is a percentage of the total assets invested in the fund, used to cover management and other costs. This reduces your overall returns.
• Annual and Custodian Fees: Annual fees can range from $25 to $90 per year, while custodian fees, typically associated with retirement accounts, can be $10 to $50 per year.
• Commissions: Commissions are fees paid to the broker for their services. These can be a flat rate, a percentage of the total trade value, or a combination of both. Online brokers often offer zero-commission trades on stocks, while full-service brokers may charge 1% to 2% of the total purchase price.
• Account Maintenance Fees: Brokerage firms may charge a monthly or annual fee for the use of their platform and research tools. These fees may be tiered, with higher fees for more advanced data and analytic tools.
• Other Fees: There may be additional costs such as loads (fees charged when buying or selling shares), advisory fees, market costs, and taxes.

Deciding on trading or investing

Trading and investing are two distinct ways to earn from the financial markets. Both investors and traders seek profits through market participation, but there are some key differences to be aware of when deciding which approach to take.

Investing

Investing takes a long-term approach to the markets, often with the goal of building wealth over time for purposes such as retirement accounts. Investors generally seek larger returns over an extended period through buying and holding a portfolio of stocks. Investments are often held for years or even decades, taking advantage of perks like interest, dividends, and stock splits along the way.

Passive investing is a common strategy, where investors follow a buy-and-hold strategy without closely monitoring the markets. Active investing, on the other hand, involves regularly monitoring the markets and making changes to the portfolio accordingly.

Trading

Trading involves short-term strategies to maximise returns within a day, month, or quarter. Traders take advantage of rising and falling markets to enter and exit positions, taking smaller, more frequent profits. They buy and sell stocks frequently to profit from price fluctuations driven by demand and supply considerations and overall market sentiment.

Traders may also employ strategies such as stop-loss orders, which automatically close out losing positions at a predetermined price level to limit potential losses.

Key Differences

The main difference between investing and trading is the timeline. Investing typically involves holding onto an asset for a long period, whereas trading could mean buying and selling assets within a day to a month.

Another key difference is the level of risk involved. Trading tends to be riskier than investing due to the shorter timeframes and the potential for more complex asset types. Traders also need to put in more time and effort to monitor market movements and make frequent transactions.

Additionally, while both investors and traders aim to profit from the financial markets, their motivations differ. Investors are generally more concerned with market fundamentals and long-term growth, whereas traders seek to maximise returns and capitalise on market fluctuations.

When deciding between investing and trading, there are several factors to consider:

• Your risk appetite: Trading carries more risk than investing, so you should assess your tolerance for potential losses.
• Time commitment: Trading requires constant vigilance of market movements, while investing can be more passive.
• Understanding of the market: Trading requires a strong understanding of market sentiment and the ability to recognise patterns, while investing suits those with a better understanding of companies and financial statements.

Knowing your investor profile

There are three main investor profiles: conservative, moderate, and aggressive. A conservative investor is typically approaching retirement or has dependent children. They prefer short-term, low-risk investments with stable returns and often focus on fixed-income investment products such as bonds or debt securities. On the other hand, an aggressive investor is generally younger, with no dependent children, and can afford to take more risks for potentially higher returns. They pursue long-term investments and have a portfolio composed of many diversified, non-guaranteed assets. A moderate or balanced investor falls between these two profiles, aiming for a medium-term investment horizon and a balanced portfolio of guaranteed and speculative investments.

To determine your investor profile, consider the following:

• Timeframe: Are you investing for the short term (1-3 years), medium term (4-9 years), or long term (over 10 years)?
• Returns: Do you prioritise income or growth? Are you looking for guaranteed returns or are you comfortable with higher-risk, higher-return investments like shares?
• Liquidity: How easily do you want to be able to access your money? Some investments, like property, are illiquid and may take time to sell, while others, like savings accounts, offer high liquidity.
• Risk: What is your risk tolerance? Are you risk-averse or a risk-seeker? Remember that higher-risk investments offer the potential for higher returns but also carry a greater chance of losing value or failing.

By understanding your investor profile, you can make more informed investment decisions and create a strategy tailored to your financial goals and risk tolerance.

Having the financial security to invest

Financial security is a prerequisite for investing in shares. Here are some key considerations to ensure you have the financial security to invest:

• Live within your means: Maintain a standard of living that is within your earnings. Avoid using excess income on luxuries, and instead, focus on reducing debt and building savings. This ensures you have financial flexibility and can handle unexpected expenses.
• Set short-term goals: Rather than being intimidated by long-term financial goals, break them down into a series of short-term, measurable, and achievable goals. For example, aim to pay off credit card debt within a year or contribute a set amount each month to a retirement plan. As you achieve these short-term goals, set new ones, gradually building towards your long-term financial objectives.
• Become financially literate: Take the time to educate yourself about personal finance and investing. Understand the basics of investing, the different types of investments available, and the risks and potential returns associated with each. This knowledge will empower you to make sound financial decisions and choose the right investments for your goals.
• Save for retirement: Start saving for retirement early, even if it's a small amount. Compounding will work in your favour over time. Consider setting up automatic monthly contributions to a retirement plan, such as an employer-sponsored 401(k) or an individual retirement account (IRA). As your income increases, you can gradually increase your contributions.
• Take calculated risks: Evaluate and take calculated risks while you're young and have more time to recover from potential mistakes. This could include moving to a city with better job prospects, taking on a new job with more growth potential, or investing in stocks with a higher risk/return profile.
• Invest in yourself: Continuously upgrade your skills and knowledge to increase your value in the job market. This could involve pursuing additional education, attending training programs, or learning new skills in high demand. By investing in yourself, you enhance your career prospects and earning potential.
• Find the right balance: Achieving financial security doesn't mean sacrificing all your current desires for future goals. It's about finding a balance between enjoying today and planning for tomorrow. For example, instead of using a credit card to finance a vacation, set a short-term goal to save for that trip. This way, you can still enjoy experiences while staying on track financially.

Remember, financial security provides the foundation for investing in shares. It ensures you have the necessary funds to invest, reduces financial stress, and enables you to make more informed and strategic investment decisions.

Frequently asked questions