10 tips for beginners to start investing in stocks

Sharjah resident Karan Gurnani may have only been trading for a few years, but already he's accumulated a solid following of 870 investors who "copy" his trades on online trading platform eToro.

The retail investor, who is in his mid-20s, learned about investing by reading books, annual reports and the financial statements of companies he is interested in.

“Some great investors I like to learn from are Mohnish Pabrai, Joel Greenblatt, Guy Spier, Howard Marks, Warren Buffett, Ryan Cohen and Charlie Munger,” says Mr Gurnani, who has a degree in finance from the American University of Sharjah and a CFA level 1 qualification.

He also hosts a YouTube channel, which currently has around 1,500 subscribers, where he shares the knowledge gained from his investing journey.

The young investor, who dabbles in shares of companies such as Twitter, Pershing Square Holdings and Chinese agriculture-focused technology platform Pinduoduo, does not believe in day trading. Instead, he leans towards the ideology that behind each stock is a business and if you buy good businesses at fair prices, the stock will tend to follow.

While admitting that he has learned from investment mistakes in the past, Mr Gurnani says novice investors must be careful about fees as they can eat away long-term portfolio gains. “Make sure to go through the fine print and check for hidden fees at the brokerage you are investing with or built into an investment product.”

First-time investors should also share relevant details of their trade with someone they trust, Mr Gurnani says. This could be information such as the name of the brokerage, what amount has been invested and why they are buying into an asset. “It is good for someone you trust to have your information in case they need to access the account in an emergency. You could also bounce ideas off that person,” he adds.

Beginners must also take time to understand a business before investing in it, rather than betting that its stock will go up. If they don't, they would be better suited to invest in passive funds, he says. “Monthly contributions to globally diversified, low-cost and tax-efficient passive funds will likely lead to a good return over the long term,” Mr Gurnani adds.

He says fledgling investors should not be afraid to replicate the investing strategy of someone they want to learn from, while they should avoid overinvesting to the point where they don’t have sufficient cash in the event of an emergency.

“Prepare an emergency fund before putting your money in the market. You shouldn’t have to sell your investments in order to fund a near-term expense. Put in an amount that you wouldn’t mind not having access to for five to 15 years.”

Financial experts have rounded up 10 tips for beginners who find it intimidating to trade in stocks. With technology lowering costs and offering access to data-driven decision making, investing in equities has become easier, inclusive and more affordable. As a general rule of thumb, experts suggest that 20 per cent of a person’s monthly income should be allocated to investing. Here’s how to get started:

1. Start now

The best time to invest in stocks is now and, contrary to popular belief, newbies don’t need a lot of money to get started. Compound interest will help transform their small investment into a consistent amount of wealth over time.

“If I put $10,000 now into a saving account and add $1,000 each month, over a period of 30 years, that’s a total contribution of $370,000,” Mark Chahwan, co-founder and chief executive of robo-advisory investment firm Sarwa, says. “If instead I was investing this money, with compounding, this $370,000 gives me more than $1,200,000 considering an average return of 7 per cent a year.”

However, don’t invest money that you cannot afford to lose, warns Paul Jackson, global head of asset allocation research at Invesco. “Stocks can be extremely volatile and if you need the money in a hurry, then you may need to sell at disadvantageous prices,” he adds.

2. Consider your age and time horizon

A general rule of thumb suggests subtracting an investor’s age from 120 to know the percentage of your portfolio to invest in stocks.

“Equities are risk assets and people near their retirement age are not advised to park a significant sum in stocks. The reason being, bear markets can on an average bring about 30 per cent correction,” Vijay Valecha, chief investment officer with Century Financial, says. Or if there is significant financial expenditure such as marriage, house purchase planned in the near term, the amount invested in stocks should be much lower, he suggests.

Beginners must understand their investment horizon, Mr Jackson says. “Could you need the money within a short period of time, in which case a more defensive approach may be justified? If you are investing over a multi-year period, then you can ignore short-term volatility.”

3. Spread your risk

Newbie traders must be careful not to put all their eggs in one basket, or in one company in case of the stock market.

“If that company goes through a tough time, that’s going to seriously hit your nest egg,” Laith Khalaf, financial analyst at AJ Bell, says. “By investing in a pooled fund, investors can achieve diversification across a range of assets and companies, and have their money actively managed by a professional if they so wish.”

4. Don’t get emotional

Amateur traders are advised not to fall for fads or a hot market trend as they are likely to incur losses.

“Investors should focus on the long term, looking beyond the latest headline or breaking news. Markets are volatile, this is their nature. But the global economy trends upwards over the long term and rewards patience,” says Mr Chahwan.

“Block any noise and don’t get tricked by how the market is performing today, tomorrow or even this month. It distracts you from making money long term.”

Investors must also determine whether they are disciplined and able to withstand losses or are very reactive. “If the latter, then they may need to develop disciplines that prevent them from trading too much, which brings the double penalty of high implementation costs and the risk of selling low and buying high,” Mr Jackson of Invesco says.

Instead, new investors should read through a company’s financials and check if their revenues and profits have risen for the past 10 years, Mr Valecha says. Financial data is available free of cost on sites such as Yahoo Finance, Google Finance, Finviz and Koyfin, among others, he adds.

5. Gauge your appetite for risk

Risk management is the most critical trait needed for a beginner in the stock market.

“If you invest in the stock market, you will see the value of your investment fall regularly. This is simply how the market behaves, it goes up and down, though the long-term trend is upwards,” says Mr Khalaf.

Therefore, beginners must be willing to sit tight when markets fall or they might end up selling out when markets are low and buying back when they’re high, thus eroding long-term returns.

A simple risk management strategy is not allocating more than 5 per cent of the portfolio to a single investment, according to Mr Valecha.

6. Consider passive funds

This asset class is great for novice investors as they park money into a global tracker fund, which follows the performance of the world stock market, Mr Khalaf says.

“These funds simply track an index, which makes them simple and they’re a low cost way to invest, typically less than 0.1 per cent per annum.”

Research shows the underperformance of active trading. Every year, S&P Dow Jones Indices conducts a study on active versus passive management. After 10 years, 85 per cent of large-cap funds underperformed the S&P 500, and after 15 years, nearly 92 per cent trailed the index, it was found.

7. Control your costs

Fees are an unavoidable part of investing, but investors must ensure they don’t chip away at portfolio returns. A good rule of thumb is to keep investment fees below 1 per cent, Mr Chahwan says.

“Approximately 1.15 per cent in additional fees can destroy 28 per cent of wealth,” he adds.

The co-founder of Sarwa suggests opting for low-cost funds, such as an exchange-traded fund, to keep a lid on investment fees.

8. Invest regularly

Investing on a regular basis rather than a lump sum investment can help you become a more disciplined investor.

By putting money into the stock market bit by bit, investors can mitigate the risk of putting in a large lump sum just before a big market fall, says Mr Khalaf.

“A systematic investment plan whereby an investor puts in regular payments into the trading account will help in averaging out the costs on a monthly or quarterly basis,” Mr Valecha says. “Timing the market is extremely tough, and SIP [Systematic Investment Plan] is better than investing a large sum in one single shot.”

9. Develop an investment style focused on your values

Beginners can choose a set of principles to guide their investments. For instance, they can opt for growth, value, a combination of the two, or yield, “but whatever it is, identify it and stick to it”, Mr Jackson of Invesco says.

“The market will do its best to shake your beliefs. Momentum investing [chasing what has recently been working] may feel comfortable but is a costly exercise due to the high turnover,” he adds.

10. Seek professional help

Investors who find it tough to understand financial markets should seek help from a licensed professional operating under a regulated financial entity.

“In the UAE, companies operating in the financial market are regulated by the Securities and Commodities Authority. The market consultant will help beginners to navigate the intricacies of the stock market,” Mr Valecha says.