Investing in shares can be tricky - picking points of interest where you may sell or buy is always a hurdle hence why so few people manage to successfully pick the bottom and sell at the peak. Many people often purchase shares in a specific company without proper research and this can ultimately be a very risky tactic. Even a little research can greatly improve your knowledge on future price movement. This article will outline a few tips to improve your investment decisions and ensure you have full knowledge when making a transaction. The tips will range from basic fundamentals to more tactical decisions.
Always check the Bid/Ask prices when purchasing shares
Whilst this is not a particularly common problem, some new investors do fall into this trap. To illustrate this point its worth using an example. Also, do note that this issue normally affects 'illiquid' companies. These are companies where buyers and sellers are more sparse. Today, Mirland Development (LSE:MLD) did not move in share price. However, it traded up to 107p before closing back at 105p. To purchase the share you buy at the ask price. The ask price is almost always higher than the current price. This means that when you purchase shares you make an automatic loss. Vice versa, when you sell, you do this at the bid price which is normally lower that the mid-price. Mirland's current ask price is 107p - a full 1.90% above the share price. Equally, you can sell at 103p, almost 2% below the current price. In total this means that you will lose a fairly large portion of your profit when you sell. Make sure to check this when buying as well, the bid/ask spread (the difference between the bid and the ask) fluctuates intra-day so at different time you can get better/worse offers. As a general rule of thumb, try not to invest in a share whose ask price is over 5% above the current price as the share must rise 5% before making paper profit, and most likely another few percent to make real profit.
Understand the likely ROI (Return on investment) you may make
Nice simple idea. If you are planning to invest less than £1000 then reconsider, or ensure you know what sort of return you are expecting to make. For example, if you spend £500 in Tesco, 0.5% will be lost in stamp duty hence leaving you with £497.50. Commission will take ~£10 each way, but if you factor in the buy-side that leaves you with £487.50. Realistically, returns on this with large companies like Tesco will be fairly small. Since April 2012, Tesco has traded from circa 325p to now 342p. This is 5.2% which is normally a decent return, but this only equates to £25 in over 5 months - not a particularly good return by any means. Then you take away the charges and its a very small amount. Whereas if you were to invest £10000, the charges would leave you with £9940 and you would make a profit of over £500 which is far better. Smaller firms are evidently more volatile hence profits/losses can be larger and smaller sums of money may be more worth investing in.
Set a target price where you can re-evaluate
Its always good to set a target price when you invest in a company and set it at a REALISTIC level. For example, if share y is trading at 15p/share, then maybe a target of 20p/share would be good. When the price reaches this level you can go back and re-evaluate the options. Do you set another higher target, sell part of your holdings to secure some profit, sell all your shares, or even buy more depending on the circumstances. This technique satisfies both active and passive portfolios and will allow you a greater amount of control over your investments.
These will allow you to enhance your decisions and decide whether its a good/bad time to purchase a share. Learning indicators such as the RSI and MACD can make a substantial improvement to timing your entry/exit. Don't discredit charting - it can be incredibly useful.
Always do your own research before investing
Its very easy to miss out the wider picture - some sources of information tend to have a lot of bias, especially bulletin boards where almost all writers have a vested interest. Always, always check your own information before even contemplating buying in. An article with a buy signal is not always necessarily accurate - we all know how inaccurate brokers target prices are! This more importantly applies to buying after the share has risen or fallen a lot. If the shares have risen a lot be wary that you may be buying on top of a 'spike' and the price may fall sharply to retrace some of its sharp gains. Equally, when a share has fallen a large amount consider why this is - does it have a reason to rebound soon? To check this read at least the past 10 RNS' of the company in question plus its last set of results. It is often the case that once a share plummets it drifts off further quite slowly. Check if the company has other operations that may boost the price in the short term, or whether the drop is deserved. Fundamentals are rarely fully reflected in share prices, market sentiment dictates where the share is heading.
Consider possible FTSE movements
This is a very much under-appreciated factor and whilst its very difficult to call where the markets may be heading it can make a significant improve to your timing. For example, The S&P is currently at multi-year highs at over 1430 points. Personally, I think that there will be a retrace back to 1400 over the next week or so. Therefore I would consider company x's announcements. Are any due soon? If not then consider the share price movement historically, is it bullish? Then ask yourself whether the company is affected by wider market movements? Is is liquid? If the answer is yes then you are likely to be better off waiting for the market retrace to retrieve a few extra percent.
Set yourself a buy-in price
There should rarely be a rush to buy into a share on a long-term basis. If the share looks attractive and the price movement is not bullish then you can profit from this. Once again, analyse potential future news, wider index movements and then set yourself a target maybe 2- 10% below the current price depending how pessimistic you are. If conditions are favourable, you are likely to save yourself some money by buying in at a lower price. In the small event this is not the case you have not lost any money through waiting.
Diversification is key!
Not all your investments are likely to be large profit making successes. Through diversifying your portfolio in two ways you can better manage your risk. Remember though that too low starting capital can reduce returns greatly. The first way you may want to do with is through holding a variety of companies within one sector. This is particularly important in the Oil and Gas sector where the chances of success at one well are often low. Therefore if one company has a successful well whilst the other two do not, you are more likely to be better off. The other diversification may be between sectors. Holding companies in a range of sectors both defensive and risky can be useful. For example holding shares in Imperial Tobacco may offset steep market drops in more risky companies such as Xstrata. Beware of too much diversification though - when your portfolio contains over 15 companies it can become very difficult to keep track of each investment to the same extent that you can with two or three. Therefore your returns may suffer - always keep on top of your investments.
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