Chantal Marx shares eight trading tips for first-time investors.

It cannot be very safe to invest for the first time, especially when you’re building your portfolio by purchasing (and then selling) shares of companies. Stock market investing is a zero-sum game. This means that there are always losers for every winner. It is inevitable that, at some point, you will pick the wrong stock or stocks. We have rounded up our top tips to ensure that you are able to navigate the often wild and unpredictable ride and end up with more winners.

1. Invest in your knowledge

Our clients often ask this question. Investors can be confused by the sheer number of options available, including the JSE and the option to purchase stocks abroad.

Start by looking at companies that you are familiar with. Some examples:

• You switched from Pick ‘n Pay Checkers to 6060 because you love it. Add Shoprite as a watchlist.
• You are having problems with your iPhone. You don’t even consider upgrading, as it is the most recent iPhone. It also connects to the Apple Watch and Macbook. Add Apple to your Watchlist.
• You have recently changed insurance providers and are blown away by the green and purple. Add OUTsurance as a watchlist.

This is not to suggest that all companies you know are good investments, but it’s a great place to start your research.

You can use the “Invest in what you Know” option to remove certain stocks from your watchlists or sell them if they are already on it. Did you cancel your DSTV membership? MultiChoice may not be a good investment at this time.

2. Beware the next big thing

A “hot tip” is rarely anything to get excited about. In fact, by the time the average investor gets tipped on a stock by their brother/dentist/hairstylist, the smart money has already come and gone.

If everyone is talking about the “next big” thing, its value will likely have already exceeded fair market value. It could even be in bubble land if people are raving about it. At first, you may feel that you’re missing out, but in the end, you will be glad you didn’t get caught up in all of the excitement.

Bitcoin and GameStop rallies in 2021 are good examples.

3. Fundamentals are what determine the price

If you are interested in investing in stocks or want to know if a hot tip really is that hot, you should check the company’s financial status and stock price. Even though company analysis is complex, there are some things that you can do to feel comfortable with the investment.

• Revenue: Are revenues growing? Is there a good chance that the company’s revenue will continue to grow in the future?
• Profitability: Does the company make money? In other words, are its expenses lower than its revenue? You can also check the margins (profits expressed as a per cent of revenue). Are they improving or degrading?
• Cash flow: Does profit translate into cashflows? EBITDA and cash flow from operation should be matched.
• Debt: Is the debt high relative to the size of the company? Professional investors often use net debt (loans less cash) to assess the financial health of a company. They also consider “net debt” to equity and “net-debt to EBITDA ratios. You can also look at competitor balance sheets for reference.
• Value: Although not an exact science, a PE (price to earnings) or PB (price to book) ratio can provide insight into a business’s current valuation. If the PE ratio or the PB ratio is higher than usual, it may indicate that the company is overvalued or vice versa.

4. Avoid getting emotionally involved

Human emotions are always a factor, but they are even more important when dealing with money. Behavioural science is a field of academic research that focuses on investor biases, including the emotional type. Loss aversion is one of the emotional biases that investors have. This includes holding on to poor-performing stocks and waiting for them to recover. Other biases include overconfidence bias, which involves taking unnecessary risks and ignoring new information.

The first step to avoiding future mistakes is to recognize that biases exist and that we all exhibit them. Other strategies are to stick to your strategy ruthlessly and to do proper research about what you intend to buy or what you already own (to make the best-selling decisions).

5. Determine how long you plan to invest

When investing over the long term, you should not pay too much attention to the day-to-day fluctuations in your investment. Stocks are highly volatile, and if you follow the price too closely, you may become overwhelmed and anxious (PANIC!) You could make a bad investment without doing your due diligence.

If you’re investing on a purely “technical” basis, it is a completely different story. This makes the next point all the more important.

6. When and why would you sell?

It is important to set a stop-loss level that will automatically sell the stock if the price of the shares falls by a certain amount. This will protect you from big losses if the technicals fail or if something crucial to the sustainability and survival of your business happens. To avoid losing your hard-earned gains, you must have a “profit goal” and adhere ruthlessly to your initial assessment.

Even if you plan to invest for the long term, you will still need an exit strategy. You may not have a set “profit target” and “stop-loss”, but you will need to determine the circumstances under which you would sell your investment. You may find when you review your investments regularly, that the fundamentals are deteriorating or that you’ve identified other opportunities with potential upside. Do not hold the stock just because it performed well in the past.

7. Regularly contribute to your trading account and accumulate a small balance of cash

A regular debit order to your stockbroking accounts is a great way to ensure that your portfolio is consistently growing. It is good to keep some money in your trading account for when opportunities arise.

Cash in your account forces you to evaluate your investments and decide whether to increase your investment where prospects are good, reduce your losses, or take more profits.

8. Diversify, but don’t go overboard

Professional and retail investors should both follow the principle “Don’t Put All Your Eggs in One Basket”. Diversifying your holdings among several companies, industries, and geographical areas can dramatically reduce portfolio risk. If, for example, your investment in a company fails due to boardroom shenanigans, this won’t affect your other stocks with different magnification benefits begin to diminish; however, if you invest in too much stock, your portfolio will start to behave like an ETF. Experts recommend a portfolio with at least 20 stocks, but no more than 30, to achieve a balance between managing risk and maximizing return without sacrificing it unnecessarily.