Maxim Manturov, Head of Investment Research at Freedom Finance Europe
There was a sizeable rise in new investors during the pandemic as rates sank to record lows in March and April 2020, and a new breed of bargain hunters sought to make money fast. In fact, a surge in new accounts showed that younger, less experienced investors viewed this sudden downturn as the perfect opportunity to dip their toes into the stock market for the first time. Other motivations include affordable retail accounts with zero commission and new trading platforms for Millennials, all of which inspired newcomers to take the plunge.
However, while the actual process of buying stocks is not particularly difficult, what can be challenging for novice investors is choosing to put money into companies that consistently beat the stock market. This requires a lot of background knowledge and research, meaning investors must put in extra time and effort if they wish to benefit from long-term gains. Put simply, investing is not a one-shot process.
Alongside this, younger, more self-confident investors often make riskier choices based on gut instinct, which explains why regulators are cautious about this sudden flux. While it is encouraging to see that younger generations are trying to get stuck into investing, it is important they act with caution and do the research before splashing the cash. They have time on their side to get to grips with the do’s and don’ts of the stock market, so they must ensure they leave their emotions at the door.
In light of this, below I share my top tips for investors who are looking to enter the stock market for the first time, make data-driven decisions and seize ripe financial opportunities. Ultimately, the stock market, unlike the racetrack or casino, is a generous bookie in the long run. People tend to get more money back than they put in and investors must learn that high-risk investments are not always the way to go.
Background research holds the key to success
First and foremost, it is beneficial to do some background research into the company. For more in-depth knowledge, Warren Buffett, one of the world’s most successful investors, advises against choosing a company whose business model is unclear. As such, before choosing to invest, regardless of the size, reputation or hype surrounding a company, you should always do your research and understand its operations. In other words, you should never simply rely on what one person is saying. As an investor who is eager to learn new things, you need to feel comfortable and become well versed in undertaking independent research.
First-time investors should also follow the diversification concept to limit the risks of specific sectors or businesses, and not commit more than 5-10% of their portfolio volume to a single company. Emotion is the single greatest impediment to investing. Investors must not allow fear or greed to influence their judgments. Instead, they should consider the larger picture and think about their decision carefully. Stock market returns can vary considerably in the short term, but historical returns for large-cap stocks can average at 10% in the long run.
Get to grips with fundamental and technical analysis
Becoming acquainted with fundamental and technical analysis is another key step, not only to gain a better understanding of what to invest in, but also to determine trends, support and resistance levels. For example, studying basic indicators such as the relative strength index (RSI) is crucial, as it enables investors to achieve at least a certain degree of success in the markets. It is also necessary to determine the initial investment amount, which should be enough to eliminate any negative influence on investment decisions. First, it is important to determine whether the company has a fundamental potential for growth. And then, technical analysis will start to establish if the stock is steadily rising or moving sideways.
Create a smart investment strategy
Finally, you should always create an investment plan to develop your own strategy for stock market trading. This includes setting specific and realistic goals, taking the time to understand your current financial situation and developing your risk profile. You should also pay attention to financial performance and choose a company with a good balance sheet, low debt burden, high margin and sustainable average annual growth, as well as other positive financial indicators. Smart, pre-planned strategies can help first-time investors to build wealth efficiently and securely, while also moving them closer towards their end goals.
The current economic outlook
In general, larger, more mature firms still have significant growth potential, so I would suggest investors pay attention to tech giants and major banks, as well as the healthcare and cyclical industries that are speeding with economic growth, given the current economic outlook. IPOs, in general, will also complement portfolios extremely well. If the risk is larger, investments in IPOs have more growth potential, and with sufficiently solid fundamentals, such investments are more likely to provide a favourable outcome. Just make sure to follow the basic investment guidelines before coming to a decision.
