Just like in a chess game the share market sometimes can be tricky with lots of twists and turns as you walk along the path of an investor, and if you haven’t thought it out carefully you could lose a huge sum of your money in one instant. Therefore you will need to have a financial plan that will evaluate your current financial position, determine the kind of risks that you’re willing to accommodate and whether or not you have adequate knowledge and skills to go through with it. You will also need an investing strategy to follow. If you rush into something that you only have so much as a vague idea of, then it could be detrimental to your finances.
Understanding how you plan to invest involves looking at your immediate financial position, considering your level of knowledge and confidence in your investing skills and considering the stage of life that you are at, for example, investing when you are young may look different to investing when you are near retirement age. The other thing you should understand is your risk profile. After all, you need to be able to sleep soundly at night!
Your strategy should provide you with a set of guidelines to follow and should ensure that you maintain a consistent approach to investing as well as diversifying your investment. This means that you choose various different asset-class to put your money on, because there’s no guarantee which asset-class will score well today and which will go down tomorrow.
Once you’ve determined a strategy then it is always strongly advised to undertake some form of simulation to test your system prior to putting your hard earned cash on the line. This is particularly true if you are looking to trade shares in the short or medium term. Some investors simply buy and hold shares with a long term view that they plan to simply ‘ride out’ market fluctuations. For some this is a perfectly valid strategy also. The key point is that you have given thought to your strategy rather than simply jumped in without understanding the risks and benefits.
Keeping records of how well or how badly your shares perform is also a very good thing, because it allows you to track your progress and understand how your investment and investment strategy is performing.
Types of Sharemarket Analysis
There are two main forms of share market analysis, fundamental analysis and technical analsyis. Investors may choose either one or a combination of both forms of analysis in selecting shares and determining the best shares and timing for buying and selling.
Fundamental analysis is where an investor studies a company, including anything that may affect the companies earnings and overall value, such as the company management, sector performance, company earnings and expenses. This sort of information comes from company reports, historical sharemarket data and the media. Many people rely on this sort of analysis to determine which company to invest in. There are several markers, or key pieces of information to be assessed, including:
- Annual reports
- Dividends paid and dividend yields
- Earnings per share (EPS) and price earnings (PE) ratio
Technical analysis is about analysis of historical price movements of a share and the market in general. Many investors believe that by understanding the charts one can best estimate where a share price is heading. There are many different types of charts as well as mathematical chart indicators used in technical analysis.
The potential for increase in wealth and even financial freedom is attractive to many, however, knowledge of share market basics are key in understanding stock market terms and processes before you launch yourself into an investing career.
There are risks and benefits that one must education themselves on before investing and it pays to develop a set of rules of guidelines to follow that are congruent with your overall strategy.
Education is the key to understanding stock market workings and increasing your knowledge of share market basics should precede putting your hard earned money on the line. After all, the aim of the game here is to increase wealth, so why not maximise your chances!