19th January 2021 | Tomasz Krajewski | Senior Investment Product Implementation Specialist

6 tips before making your first stock investment

Stocks are one of the most popular financial instruments amongst investors. Before you start investing, you should know what a stock is, what rights it gives you, the benefits, and the risks that may arise with the purchase of this type of financial instrument.

What are stocks?

Stocks are indivisible, transferable equity securities that confirm the holder's stocks in the shareholding of the company.

Stocks can be purchased on the primary market through a private or public offering, and on the secondary market on the stock exchanges. 

As a shareholder, you have the property and non-property rights such as:

  • The right to dividends (profit share). If a resolution of the general meeting of shareholders is adopted on the division of an option developed by the company or an undivided profit from previous years, the funds are paid out in proportion to the number held by the shareholder;
  • The right to participate in the distribution of property in the event of liquidation of the company;
  • The preemptive right to shares, i.e., the priority to acquire new issue shares;
  • The right to dispose of shares;
  • The right to participate and vote at the general meeting of shareholders;
  • The right to information about the company, if it is justified for the purpose of assessing an issue on the agenda and the information does not harm the company;
  • The right to appeal against resolutions of the General Meeting of Shareholders if the resolution is inconsistent with the statute, good practices, harms the interests of the company, or is intended to harm the shareholder.

Why do people buy stocks?

The main reason for buying stocks is to make a profit over a certain period by increasing their value, and/or receiving a dividend.

The possibility of generating profit is closely related to the risk and the higher the expected return on investment, the higher the possible risk.

When investing in stocks, be aware of various types of risk, such as price volatility, bankruptcy risk, liquidity risk, financial and economic risk, and others.

Knowledge is profitable

The more we know about a potential investment, the better we can assess the potential profit and the risks associated with this investment.

To properly assess the value of stocks and limit the potential investment risk, an analysis should be carried out based on:

  • Macroeconomic analysis - It is based on an overall assessment of the attractiveness of investing in a given stock market, where we assess, inter alia, the socio-political situation of a given country, general economic situation, (GDP, inflation, interest rates, unemployment rate, etc.), economic policy conducted by the country;
  • Sector analysis - assesses the investment in a company belonging to a given sector of the economy - the expected profitability of investing in each industry and the risk accompanying this investment. Changes in the development trend of a given industry and the market environment are analyzed here, and global trends are also examined;
  • Situational analysis -The main goal here is to evaluate the company across the whole sector. The company's position on the market and its prospective development from the non-financial point of view are examined. The company's situational analysis also includes SWOT, describing the strengths and weaknesses as well as the opportunities and threats facing it. This analysis is to define and understand the subject of the analyzed activity, in particular: what does the enterprise do, how does earn money, what is its policy and market approach, etc.
  • Financial analysis - from the investor's point of view, it is the most important part of the fundamental analysis. Thanks to its results, we can determine how much the analyzed company is actually worth, its current financial position, and the ability to generate profits in the future. The analysis comes down to examining three basic financial statements: Balance, Profit and Loss Account, Cash flow statement. Based on it we may conduct an analysis of financial indicators, and their comparative assessment both over time and to other representatives of the sector.

6 tips for new investors

Capital markets have a long and rich history, thanks to which we can build on the past when making investment decisions.

1. Buy Low, Sell High

It may sound easy, but it is not that simple. At first glance, it is impossible to judge whether we are buying lows even if the price is the lowest in history, a fundamental analysis can help us to assess whether the current price is a bargain. On the other hand, the share price may be at the all-time high, but is not unlikely to be higher. Profitable companies are usually the most valuable asset so their prices can go up over a very long period of time.

2. "Be fearful when others are greedy and greedy when others are fearful"

Warren Buffet - one of the most famous investors and one of the richest people, always says to buy stocks when there is panic on the market and sell when the market is euphoric. There are cycles in the financial markets that are based on the global economic situation. Usually, after a period of prosperity comes a period of cooling down, and conversely, after times of recession, there is usually an improvement. It is the same in the stock markets, which is why the timing of the decision to buy the stock is so important. When buying stocks on a long-term bull market, we risk that a cooling down and a sell-off on the stock market will come soon.

3. Don’t listen to advice

Buying stocks based on someone's advice is not really a good idea, the result is that we will not learn to invest, and thus we do not develop, we do not expand our investment skills or knowledge. Additionally, by listening to someone else's advice, in the event of a loss, we look to blame for the person we listened to, not for ourselves. By investing on our own, we can learn from our failures and thus build a better investment strategy for the future. Of course, we can rely on information from other sources, but we should make an investment decision only after analyzing it ourselves.

4. Preprare a strategy before trading

Before making an investment decision, think over your strategy, what profit will be right for you and what loss you are willing to accept. After the transaction, stick to this strategy, it is very important, thanks to this approach you are in assessing the effectiveness of your investment strategy and you may to possibly improve it.

5. History does not matter

Remember that the world is constantly changing and something that was important 10 years ago may not be so important anymore. History shows many cases of publicly traded companies that were unable to adapt to the changing world, which made them run into financial problems and even went bankrupt. That is why it is so important to observe your investments and their cyclical analysis.

6. Buy and hold

Many analyzes indicate that a buy and hold investment is the most optimal investment strategy. This seems like a very simplistic approach because we can buy stocks of a company that will suffer financial losses in the long term, so the price of their stock will fall. Therefore, before purchasing, it is important to analyze what we buy and periodic analysis of our investment portfolio. 

Notice: Golden Sand Bank ("Bank") exercised due diligence to ensure that the information contained in this publication was not incorrect or untrue as at the date of publication. All Investment products are at risk, as their value can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek financial advice. This publication is not an investment recommendation or investment advice in connection with any services provided by the Bank to the Client.

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