Want to move to the next level of investing? Here's the how and why.
Many people view the stock market as a place where fortunes are made and lost in a heartbeat. I certainly did when I began investing in the stock market. I had no financial qualifications and no formal financial education.
However, through my own efforts I have managed to build a successful share portfolio and gain a job in investment banking. My point is, you don't need to have financial parents, background or formal education to become a reasonable investor. If I can do it, you can certainly do it too.
You may be asking yourself, what is the point of all this when you can take the advice of others?
The aim is to increase confidence. Confidence as an investor in my opinion is the most crucial aspect of investing. Many people get sucked into the mistake of slavishly following the market through its pirouettes and twirls. This leads to an important lesson: The market is a tool that lets you purchase or sell shares. The market is not a replacement for your own understanding of what something is worth.
Maybe people want to increase their skill and ability as investors, but are unsure how to go about it. By a long way, investing in books is one of the best investments anyone can make. With most stockbrokers charging around £10 for a share purchase, books quickly justify their value by preventing those purchases that turn out to be unprofitable regardless of the share performance itself.
The Motley Fool has a list of books that I can heartily recommend as being extremely worthwhile purchases.
The route which I chose to take, which is open to everyone regardless of background, was to do the basic level of a professional qualification. A popular course for investors is the Chartered Financial Analyst Level 1 examination. It's designed to be studied part time over a period of several months and covers a wide range of financial analysis and financial instruments which can be vital in increasing an investor's confidence. It certainly had the effect of boosting mine.
Who are the people who succeed in trading in any market? Answer: the people who know best the true value of what they are buying and selling. From the antiques dealer who wanders through car boot sale to the Kenyan market-stall owner, it's the same use of information that makes some succeed over others. The Kenyan market-stall is closer to the London Stock Exchange on Paternoster Square than geography suggests.
It's always discomforting that stock prices fluctuate so excessively. Here are the % differences between the highest and lowest prices for a few British companies over the past year: British Telecom
(LSE: BT.A)
- 64%, BG
(LSE: BG)
- 40%, British Airways
(LSE: BAY)
- 88%, BP
(LSE: BP.)
- 42%.
It defies logic that the value of businesses selling these products can double and half within a year. If your baker said his shop had halved in value but had then recovered within a year, you would think him hypersensitive to the sale of his bread.
So how can the market fluctuate so dramatically? Quite simply, because it only deals at the price people willing to buy and sell are trading. If lots of people want to sell and few want to buy then the price will decrease.
I'll repeat the previous sentence because it is very fundamental to how the stock market works. It only deals at the price people are willing to buy and sell are trading. If you have a good idea of worth and value, you'll be above the level that many are when they enter the market and well placed to take advantage of the fluctuations.
It takes work and effort to learn, but patience and the correct mindset are half the battle. To paraphrase a golf metaphor, the game is 100% intellectual and 100% emotional. Bear in mind, when you wander blithely into the market, somewhere a stallholder is spending their time figuring out exactly what you are selling and buying is really worth...
