Novice investors: Avoid temptations and hype

By Maxim Manturov, Head of Investment Research at Freedom Finance Europe

The global stock market witnessed a surge in new users during the coronavirus pandemic, with many younger investors eager to pile into stocks and make money fast. As rates sank to record lows in March and April 2020, this new breed of thrill-seeking investors ploughed into the stock market unlike ever before on the hunt for a cheap bargain. Other motivations include low interest rates, affordable retail accounts with zero commission, and new trading platforms for Millennials, all of which have inspired newcomers to enter the investment scene for the first time.

On the one hand, regulators are right to be cautious about this major jump in new users, with younger, more self-confident investors often making riskier choices based on gut instinct. However, on the other hand, it is promising to see that millions of twentysomethings are at least trying to engage with investments and they will soon come to understand the risks they are willing to take. Essentially, they have time on their side to learn the tricks of the trade and advice on investing sites can often be insightful if followed correctly.

Thanks to recent advancements in modern technologies, trading platforms have also become more accessible, particularly for Millennials and younger generations who spend a significant amount of the day on their phones, laptops or PCs. As a result, more than ten million new brokerage accounts were opened throughout 2020.[1] For a significant number of these users, this was the first time they had ever traded on the stock market. Alongside this, younger investors are increasingly gaining trading advice, tips, and news from social media platforms, and with increased exposure comes greater incentive to invest.

With this in mind, below I will explore my top tips for novice investors looking to capitalise on the most exciting IPOs, as well as the importance of researching, practicing, and planning before making a final purchase decision. Ultimately, the stock market, unlike the racetrack or casino, is a generous bookie in the long run. People tend to get more money back than they put in and investors will learn that high-risk investments are not always the way to go.

Improve your confidence through research
When an amateur investor buys any stock, they should always remember they are actually buying a small share of a company. This means they should take the time to find out what that company does, how it is doing financially, why there is a lot of media attention surrounding it, and why it’s stock price may increase or decrease. For example, it could be useful to do a news search to gain information from people outside of the business, who have different perspectives on its public offering.

In other words, before buying any stock, you should always do your own research and not simply rely on what one person is saying, which can also help you gain investor confidence. As an investor who is eager to learn new things, you need to feel comfortable and become well versed in undertaking independent research.

Stay firm during volatile times 
Such confidence, in turn, will help you to stay firm during price fluctuations and volatility, which always occur and can often become a reason for losses if not responded to appropriately. The key takeaway here is that market volatility is inevitable – stocks and prices will always go up and down, you must therefore learn to sit tight during short-term fluctuations and cash out at the right time.

Long story short, when you buy a stock, you must understand why you are buying it. With enough reasoning and research behind your investment, you are less likely to sell your assets straight away and will wait for these to increase in price, which will hopefully bring you long-term profits. Choosing to stay invested can bring great returns if you are confident and bold in your choices.

Create a smart investment strategy
And finally, you should always create an investment plan to develop your own strategy for stock market trading. This includes setting specific and realistic goals, taking the time to understand your current financial situation, and developing your risk profile. For example, you may want to base your investment strategy upon minimising risks through diversification and limits by sector and stock type.

You should also pay attention to financial performance and choose a company with a good balance sheet, low debt burden, high margin and sustainable average annual growth, as well as other positive financial indicators. Smart, pre-planned strategies can help first-time investors to build wealth efficiently and securely, while also moving them closer towards their end goals.

[1] https://www.wsj.com/articles/new-army-of-individual-investors-flexes-its-muscle-11609329600