The Golden Rules When Buying Shares

Whatever your reason, there are some golden investment rules it pays to follow.

Prices that go up can come down

The first and most important thing to remember is that the price of shares can go down as well as up. Just because a share may have been performing very well for many years, there is no proof that it will continue to do so. All sorts of unforeseen and unexpected events can bring about sharp reversals in a company’s fortunes.

What can you afford to lose?

You should never invest more money than you can afford to lose.

Understand your attitude to risk

To get the biggest rewards you have to take bigger risks. This attitude can get you huge returns on your investments but can also lose you all your money. If you really want a gamble, this is the route for you.

However, most people want to minimise their exposure to risks in the stock market. Avoid putting all your eggs in one basket - a variety of investments across a range of different companies in different sectors of the market is more likely to protect you from the ups and downs of individual shares.

There are many varied ways to spread your risk. You could choose to invest in companies in different sectors of the market, such as banking, retail and technology, or you could spread your risk by picking some large companies and a selection of smaller businesses.

Bigger can be safer

Large companies, with strong finances and a long history, are far less risky than small, recently formed businesses whose strength hasn't really been tested on the market yet.

Big, safe companies are known as “blue chips”, a reference to gambling where blue chips traditionally have the highest value. Such companies are very unlikely to go bust. But even these are not completely immune. The poor performance of Marks & Spencer's share price over the past couple of years is testament to that.

The flipside of “safety shares” is that they are unlikely to grow fast, so you could expect a steady, unspectacular return from this kind of stock.

Be in it for the long term

To insulate yourself from falls or even stock market crashes, experts believe you should plan to keep your investments for a minimum of five years. That way, you’re more likely to ride out any downturn. If you think you could need your money before five years, you should steer clear of investing in the stock market at all.

Don’t panic and sell at a loss

The worst thing you can do should you suffer a downturn in one or all your shares, is to sell. This simply crystallises your losses. Keep a cool head and see what happens to the price of the shares over the next few months or even years. If losses occur across all your shares and were linked to a general stock market downturn, chances are that the market as a whole will recover in time. If your losses are connected to a particular share, you need to make a judgement call as to whether the company’s fortunes will change.

If you think the situation will remain poor, it may be best to cut and run with whatever funds you have left.

It’s much easier to buy than to sell

Selling is the only way to cement any gains. A “paper profit” is just that – worthless. Many people find it hard to sell their shares, particularly if they have made a profit.

There is no room for sentimentality in investment. It can often pay to accept that you will never sell your shares at the very top of the market. Waiting for the top can expose you to seeing your valuable shares slide in price.

Further Reading