With around one third of Australians surveyed by ASIC holding investments other than their superannuation or their home, it’s never been more important to have a solid understanding of how to invest wisely and manage those investments. With Business Review Australia previously sharing the 10 riskiest industries to invest in, prominent Australian stockbroker and founder of KOSEC- Kodari Securities, Michael Kodari, shares his top four tips on how to be a great investor.
Build a financial strategy
While investing in the share market can deliver great returns, there is always an element of risk to every investment. Building a comprehensive financial investment strategy can help safeguard against potential losses and maximise potential profits. A solid investment strategy should take into account the shareholders financial goals and personal finances to determine how much money should be invested, and where that money should be invested.
Inexperienced investors should steer clear of getting too involved in the complexities in terms of investing strategies. Instead, they should look at the bigger picture and focus on the value of a company rather than the stock price.
It’s also important to set a target price for each stock and monitor these prices carefully. Take the emotion out of investing and avoid chasing losses, instead seek out fundamentally sound businesses in better sectors.
Know your funding and risk levels and stick to them
Every investment carries some level of risk in exchange for a potential financial reward. While a higher risk option has the potential for a higher return, a savvy investor is able to assess the level of risk an investment has and whether they are in a position to accept that risk.
Investors should set themselves a level of funds they are willing to start off with in the stock market and avoid extending themselves beyond what they are capable of. Many of us are conservative or ‘risk averse’ investors. For those investors, it’s a good idea to purchase a company whose price is less than the true value. The bigger the gap between the two, the greater the margin of safety. Another way to lower risk is through diversification, which involves investing across several different asset classes and sectors, rather than channelling all investment funds into one sector or company.
Do your homework
Many people find investing in the stock market complex and overwhelming, as there are over 2000 publically listed companies currently listed on the stock exchange that can be traded. A recent study conducted by ASIC on financial behaviours revealed that many Australian investors hadn’t heard of, or felt they didn’t really understand, key investing concepts like risk and return trade off or diversification.
Increase your knowledge by becoming familiar with the ASX website and the various sectors that exist within the stock market. Businesses that have strong brands, dominate pricing power, and lower costs have the best chance at growing earnings and ultimately the company’s value. Invest in businesses with a quality offering, a track record of delivering results, and an experienced management team. Remember that the value of a company share is dependent on many different factors, including company performance, economic changes and demand.
A qualified financial adviser can cut through the clutter and help investors manage their portfolios to maximise profits.
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Be careful of who you speak to gain advice
It is in our human nature to trust our family, friends and acquaintances. More often or not, we take advice from these trusted people. We sometimes need to step outside that circle to take a more objective view and ask ourselves—how much does this person know about the stock market? Are they investing in quality businesses?
In order to buy or sell shares, a stock broker is required to execute all trades in the market. All stockbrokers charge a tax deductible brokerage fee for executing your trade, which can vary depending on the stock broker and level of service.
Depending on the complexity of the portfolio and the experience of the shareholder, there are two different types of stock brokers that can be used—an Advisory Broker and a Non Advisory Broker. An advisory broker, or full service broker, provides investment advice, and is ideal for those new to investing in the stock market, or those who either are not confident or have an extensive share portfolio. A Non Advisory Broker, or no advice broker, simply executes the buy and sell orders in the market and provides no guidance as to what shares to buy and sell. Every share holder should conduct their own research, regardless of what type of broker they use, as they are ultimately responsible for their own investments.