Buying Shares
You should consider buying shares only if:
- You have at least one year’s income saved and available on demand
You need to have instantly accessible savings to pay for the unexpected. The unexpected can include funerals, washing machines or repairs to the car after an accident. The unexpected is just that, and you do not want to have to sell your shares at a time when their value may be temporarily low just because you have no other savings to cover that essential expense.
- You accept that share prices can fall and you might lose money
Intellectually you know that prices can fall, but you need to accept this as something that can happen to you. You must be comfortable with the idea of losing a good part of your capital, should the market fall, or the fortunes of your chosen company go down.
- You understand the stockmarket
Only a fool invests money in something that he or she does not fully understand. It is only by understanding the stockmarket that the investor can work out when to sell and when to buy.
- You have the time and ability to research which stocks to buy
Research into a company’s financial condition requires time and the ability to understand the company’s accounts. It is no good relying on the stock picks from the Sunday newspapers, as so many do. You need to understand terms such as yield, Price/Earnings ratio, historical debt, and many more. If your understanding of theese terms is less than complete then you should consider investing in unit trusts instead and use the managers’ expertise. Without this expertise you would be almost as well off putting your $5,000, or whatever, on a horse with a name you liked.
- The time is right
Consider timing your share acquisition to coincide with a general fall in share prices. Go against the herd. If there are few buyers then the price will be low and you will be able to acquire more shares for your money.
Similarly, when the stockmarket is high and everybody and their dog is talking about share prices then consider selling, because these are signs that the market has peaked and is only rising because of its momentum, rather than because of any intrinsic increase in value of companies.