Investing in the stock market allows you to make your savings profitable, but it also has associated risks. Profitability can be negative if the sale price is lower than the purchase price. Therefore, to start investing it is important to be aware of the step we are going to take and to know how the markets work.
Investors trade on the stock market the ownership of a part of the company, which is what the shares represent. The CNMV defines them as “a value that represents a proportional part of the capital of a company”. Its price – called quote – varies depending on supply and demand. That is, the more demand there is, the more the price will rise. Or when there is little supply, it will also cost more to buy a share. This will depend on many factors and can be very volatile.
Volatility is the variability of the profitability of a security -how much it rises and falls) with respect to its average in a given period of time-. It is a way of measuring price risk. In this sense, the CNMV warns that “the main risk of equities is the uncertainty about their returns.” Although the behavior of the markets is unpredictable, some rules can be applied to try to avoid or at least minimize possible losses.
Do not invest in what is unknown
One of the first steps before investing should be to find out about the investment that is going to be made. Information is a fundamental tool for the investor and must be used to decide which stocks to invest in. Peter Lynch, who managed the most profitable fund for more than 10 years, one of the pieces of advice he repeated was that “you should not buy a stock because it is cheap, but because you know a lot about it.”
Diversify to manage risk
Among the most repeated tips when it comes to investing, diversification stands out. It is an investment strategy that is based on the idea that it is less risky to buy a little of many things than a lot of one thing. Concentration risk is the possibility of suffering losses from investing too high a proportion of available money in a single asset or type of asset.
To avoid this, you must diversify. That is, distribute the money among several different investments. The investor must maintain a portfolio with assets with different levels of risk and potential profitability, from different sectors of activity -industry, services, food, new technologies, banking, energy, construction…- or from different geographical areas. Thus, the possible losses of some investments could be offset by the gains of others.
Invest for the long term
The time horizon of the investment is one of the decisions that must be taken into account. In general, a very long time horizon allows you to assume more risk, in search of higher returns. For this reason, the CNMV recommends that most retail investors “conceive investment as a medium or long-term strategy, which reduces price risk.”
Avoid investing the emergency fund.
The importation of the investment must be decided based on the financial situation of each investor and taking into account that there is the possibility of losses of the registrar. In this sense, you have to know a key concept for personal financial planning: the emergency fund. It is about “some savings set aside as a safety cushion to be able to face important unforeseen expenses and protect you in the event of suffering a loss of income for any reason,” explains the CNMV. That matter should not be invested in the stock market since it is not known when you might need it.
Invest according to your profile
Not everyone has the same economic characteristics, nor objectives. The financial and personal situation will determine the investor’s profile and from it the investment style and the risk that each investor must and can assume must be established. Risk is one of the main points to consider, what level of profit or loss you expect to apply to the investment based on risk aversion.
In addition, there is a subjective component linked to the investor’s way of being and psychological willingness to assume losses. Despite the fact that their economic situation and other factors allow a profile that assumes greater risk, not everyone feels comfortable with the possibility of losing part of their savings.
