Which stocks are good investments? Should you bet on different individual stocks or on stock funds? Many questions arise when buying shares for beginners and newcomers. Therefore, investors should clarify these questions in advance to avoid losses and unnecessary risks before investing. This guide will answer many of your questions.
1. Which stocks should you buy as a beginner?
“Which stocks should you buy?” is the question beginners ask the most about stock trading. Generally speaking, you should never concentrate on individual stocks but rather diversify them more broadly with regard to the different markets. Diversification reduces the risk of investing. Furthermore, if you only bet on individual stocks, you may miss out on the returns in other markets.
When buying shares for the first time, beginners, in particular, tend to limit themselves to their home market. In South Africa, this is the stock index JSE TOP 40. However, the orientation towards the JSE is by no means wrong. For the first purchases, in particular, it makes sense to also include the JSE 40 values. This is because the JSE 40 contains the 40 largest South African companies listed on the Johannesburg Stock Exchange. These companies have the highest stock exchange turnover and the largest market capitalization. This makes them a good start for beginners. In addition, it is also worth taking a look at the international markets. For example, in the USA, The S&P 500, which contains 500 large US companies, is similar to the JSE 40 (only 12 times bigger regarding its number of companies).
2. Buying stocks or stock funds as a beginner?
Before you can successfully invest in stocks as a beginner, you must, of course, first decide which securities you want to buy. On the one hand, there is the possibility of buying individual shares. On the other hand, you can also use equity funds as an investment.
The difference between stocks and stock funds is quite simple. A stock is a specific portion of a company. A mutual fund contains many different stocks. The fund combines up to 50 different stocks depending on the industry or geographic location. The advantage is the automatically high diversification. Therefore, many experts advise against buying just a single share of a company, as the risk of losses is significantly increased. Buying equity funds is, therefore, not a bad idea for beginners, but you should be aware that this will incur additional costs. An equity fund is managed by a fund manager who incurs fees.
Anyone who deals with stocks will also come across the topic of ETFs. This quickly raises the question of what ETFs are and how they differ from an equity fund: Exchange Traded Funds (ETFs) are referred to as passive investments. They replicate the performance of a stock market index. Trading in ETFs takes place exclusively on the stock exchange. On the other hand, equity funds are actively managed funds since the fund manager tries to achieve a higher return than the benchmark index through active intervention. In other words, he’s trying to beat the market. The benchmark index compares the various funds with one another. ETFs do not have this goal at all but want to keep costs low and reflect the benchmark index as accurately as possible.
3. Setting goals
Setting realistic goals for trading and investing should be learned from the very beginning. The best investors earn around 20% per year from long-term investments. It would be naive to think that a novice can add 100% to their account in a year. Of course, this can happen – some markets are highly volatile and offer high-profit potential. But the question is, what are the risks in this case? The only factor that can be controlled in the market is risk. The goal is always based on risk. So, setting too high goals leads to too much.
4. Can you buy shares with little money?
In general, investing particularly large sums in shares is not necessary. The great advantage of stocks as an investment is that profits can be made even with a small investment. Therefore, when buying shares, it makes sense, especially for beginners, to start with smaller amounts and share purchases. Since you should only invest money that will not be needed soon, some beginners cannot raise very large sums for buying shares anyway. Whether you invest a small amount in a monthly savings plan or buy securities that you have held as a long-term investment for many years, stocks are suitable for large and small investors.