For some, investing in the share market is an exciting prospect, as stories of investors making huge gains tempt students to embark on an investment journey. But making uninformed decisions can cause your investments to turn sour, Meld Finance Reporter Kaili Ding cautions. She raises some caveats students need to consider before dabbling in the share market.
Education and skill level
Before investing in the share market, an investor has to be equipped with education and skill.
Melbourne University’s financial aid manager Roger Deutscher says it would be unwise for students to enter the share market without a proper understanding of the workings of the share market.
“In these cases, investing in the share market would be similar to gambling,” Mr Deutscher says.
And while students can equip themselves with knowledge through their finance degree or by pouring through finance books, applying that knowledge requires practice and skill. A good way to start before going into the share market would be to practice on stock stimulator.
Even then, skill and education doesn’t guarantee a fool proof investment strategy – and investors with advanced skill and education aren’t immune to bad investments either, Raston Nga Senior consultant of Cooperate Strategy system says.
Other factors like market volatility and uncertainties can also obstruct an investor from making informed decisions, Mr Nga says.
When it comes to uncertainty, consulting a broker or a consultant may be a good way to start – but that doesn’t mean you shouldn’t do your own research before taking on the words of an advisor.
“Most professionals have a hidden incentive behind every stock they might be able to claim commission for trading the shares, so students have to be more skeptical when it comes to taking advice from advisors.” Mr Nga says.
Especially during times of market volatility, Mr Deutscher says students need to be able to assess their risks, as well as take the time to do research on the market and the company, in order to make informed investment decisions.
Risk plays a huge part in the investment process, and no investor should dabble in the share market without understanding risk. Risk forms the basis of an investor’s investment. By understanding risk, an investor is able to customise their investing portfolio based on each individual’s willingness to take on risk.
Mr Nga says proper risk management helps investors to determine what kind of investor they want to be and what investing styles or strategies they want to take.
A risk management strategy with a cut off limit will also prevent investors from losing too much money when investing in the share market.
One of the biggest pitfalls for investors is when they trade emotionally, Mr Nga says.
That includes investing in shares without proper fundamental and technical analysis, blind optimism – “hoping that a miracle will happen”, and an unwillingness to sell off shares despite share prices being on the decline.
All of this could cause investors to lose heavily.
And finally, don’t fall victim to the monkey-see-monkey-do syndrom. Just because your friends own shares doesn’t mean you have to too.
Not all students who own shares actively trade, Mr Deutscher says.
“Most local students own shares because their parents or grandparents buy shares for them and they are usually just holding onto the shares and are not actively trading,” he says.