Stocks are a key element of standard investment portfolios. Although investing in stocks requires greater risk tolerance than investing in savings accounts, stock investment can potentially deliver much higher returns over the long term.
Here, moneyland.ch lists 7 key tips for new stock market investors:
1. Choose an affordable trading platform
New investors tend to underestimate the costs of buying, holding and selling shares. There are many different costs which apply in addition to the price that you pay for shares. Brokerage fees are the most significant additional cost and these apply both when you buy shares and when you sell them. Fees vary considerably between different stock brokers so performating a brokerage fee comparison can help you save money.
Depending on the number and size of stock trades which you make and the broker which you use, you can pay hundreds or even thousands of francs in brokerage fees. Depending on the custodian bank which holds your shares, you can also end up paying a lot of money just to hold your shares. Many shares can no longer be held physically using share certificates and the electronic shares must be held in and managed by custodian banks.
Using an affordable broker and custodian bank is paramount to minimizing the costs of stock trading and maximizing profits. You can find the most affordable brokers for your specific needs using the interactive moneyland.ch stock broker comparison.
Tip 2: Buy and sell stocks online
Most Swiss brokers charge lower fees for buy and sell orders placed online through a trading platform than for orders placed via telephone, mail or in person. Depending on the broker you use, the markups charged for orders placed over the phone or through other non-automated means can be significant. At almost all Swiss brokers, trading online is the cheapest way to buy and sell shares.
3. Use stop orders and limit orders to minimize risk
You can make use of different types of buy orders and sell orders to avoid paying too much for shares or earning too little when your shares are sold. The types of orders which you can make vary between stock brokers and their online platforms. The most important orders to understand are market orders, stop orders and limit orders. When you place a market order, the trader will execute your order as quickly as possible at the best available offers. When you place a limit order, you choose the minimum price which you want for your shares (sell limit order) or the maximum price which you are willing to pay for shares (buy limit order). You can also add instructions to orders – in order to limit the time span over which the order remains valid, for example. You can find an overview of order types which are offered by Swiss online brokers in the moneyland.ch guide to stock broker orders.
Limit orders have the advantage to protect you from unwanted price fluctuations. However, the execution of a limit order may require more time, depending on your determined minimum or maximum price and the development of the market price. In case of unexpected changes in the market, the trade may never be executed. If you are in no hurry to execute a trade, a limit order may be the right choice for you.
Tip 4: Buy and hold
Buying and selling the same shares repeatedly is almost always expensive. Every time you buy and sell the same shares over again, you run the risk of buying too high and selling too low. Plus, the trading costs increase with each transaction because every purchase or sale of shares generates brokerage fees. For all these reasons, buying and holding stocks over extended periods is a surer way to realize profits.
Tip 5: Define your strategy
Taking risks can be fun and there is nothing wrong with doing so as long as you can afford it. But if you are more interested in earning real returns on your investments than you are in gambling, creating a long-term investment strategy and sticking with it is the way to go.
Take time to determine what portion of your savings you can afford to invest in the stock market. It is generally a good idea to invest only what you can afford to lose in full. Assuming that any investment in securities is a potential write-off will help you determine your real risk capacity.
When planning your investment strategy, bear in mind that historical evidence shows that stocks generally increase in value over the long term while stock prices can fall significantly – sometimes over extended periods of time – over the short term. So short-term trading is more of a gamble while buy and hold strategies are a sound investment by comparison.
Tip 6: Diversify
Unless you want to rack your nerves, consider sticking with passive investments. Studies have shown that even professional investors have not been able to consistently beat index rates using individual stocks. Using passive investment vehicles like exchange traded funds (ETFs) which follow index rates may not be as much fun as active trading (using an online trading platform, for example). However, it is a surer way to realize long-term gains because your investment is diversified across all the securities represented by an index.
Note that even passive investments require some decisions on your part. For example, you will have to decide on which index or markets you would like to invest in. For a truly diversified portfolio, you have to divide investments across multiple indexes which balance each other.
Tip 7: Use automated alerts
The more actively you trade, the more it pays to set automated alerts which inform you when rates reach certain thresholds or when orders are executed. This frees you from spending the entire day staring anxiously at a screen. Good trading platforms allow you to set alerts for events which are relevant to your trading habits. When events occur, SMS or email messages are sent to you automatically, prompting you to take action if necessary. Using the right kinds of orders and instructions can also help free your mind and avoid losses.