“Never put all your eggs in one basket”
A balanced distribution of the capital makes sense so that the investment success does not depend on the fluctuations of a few individual shares. However, when it comes to diversification, it is important to find the right balance in order to avoid losing the overview through excessive capital diversification. For a long-term investor, it is therefore advisable to fill his portfolio with ten to twenty values.
Investments in different sectors, countries, etc. are also recommended. For example, investments in the so-called emerging markets are usually subject to greater price fluctuations than shares in industrialized countries. Likewise, stocks from the technology sector fluctuate more than stocks in the food and beverages sector. This results in both higher risks and higher profit opportunities. The size of the company and how well established it is in the market is usually also important.
Because of this wide range of risk and reward opportunities, stock buyers need to consider how much risk they are willing to take. Due to their lack of experience, it can make sense for newcomers to the stock market to start with more conservative stocks and preferably choose blue-chip stocks. This is what titles are called that are among the world’s most important leading indices such as the DAX, Dow Jones 30, Nikkei 225 or EURO STOXX 50. Because don’t forget: In extreme cases, a total loss of the capital invested can threaten!
to gather information
In order to choose the right individual title, it is important to obtain good information about the companies in question – for example on the company’s website or on financial portals. In addition, the buy and sell recommendations of well-known analyst firms can also serve as a decision-making aid.
If you are particularly familiar with a certain industry, for example from your own professional experience, it makes sense to look around for a worthwhile purchase candidate. It is important that you feel comfortable with your share investment, i.e. invest in companies, sectors and regions that you are convinced of the future prospects.
The two sources of income from a stock
An important decision criterion is, of course, the expected return and thus the two sources of income from a share: dividends and price gains. However, it must not be forgotten that both are not guaranteed.
Corporations usually pursue a longer-term dividend strategy, which they also communicate. In order to be able to offer an approximately constant dividend over a longer period of time, the profit is not paid out in full in good financial years, but is partially transferred to reserves. These reserves can then be used in lean years in order to be able to pay out the usual dividends. In this way, the companies want to present themselves as an attractive investment, which makes it easier for them to find investors – i.e. shareholders.
The dividend can be understood as a signal for the future prospects of a group. For example, dividend increases are an indication of a good cash position and the Management Board’s confidence in future business development. In the case of a dividend cut, the effect is reversed accordingly.
Especially in the current phase of low interest rates, high-dividend stocks are certainly an attractive investment opportunity. However, the prospect of price increases is usually more interesting for share owners than the profit-sharing, since the price development enables higher returns. The price-earnings ratio, among other things, is an important benchmark for this. Probably the most well-known fundamental key figure indicates the relationship between the profit of a stock corporation and the current market value. To do this, the stock market price is divided by the earnings per share. A stock with a low price-to-earnings ratio is considered cheap. However, for an accurate assessment, the calculated value should also be compared to the P/E industry average.
Practice risk-free
In order to carefully get a taste of the stock market, it is advisable for newcomers to first complete a dry run. With help of a sample depots you can gain stock market experience without investing real money.
For further reading:
» Guide to securities and trading
» Buy shares: Important tips for your success when buying securities
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