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I can buy my own shares! Yes, but can you count on making 20% returns?

Posted by Hayden Kerr on Jul 2nd, 2010

When starting out with share trading, it is advisable to be cautious in the beginning, and educate yourself as much as practically possible before taking the plunge. A full service broker can assist with this process.

“Count on” is the giveaway in this article’s title. You may make 20% in a given year. You may even make 30%. The question is whether this was due to luck, good fortune or skill. Could you reliably replicate such a performance? Could you do so in any market conditions?

Understanding Bull and Bear markets

Bull markets involve a majority of investors being “bullish” or positive about the medium term outlook for investment (based on a similar opinion of the outlook for the economy). Such a view results in investors being prepared to pay higher prices for shares (which they anticipate will be justified and rewarded in the form of higher company profits in the future). Such conditions assist an investor in making good returns. “Bear” markets are the opposite, and characterised by markets trending downwards, due to “bearish” or pessimistic views of the market’s medium term prospects. It is much more difficult to make good returns trading shares in bear markets.

Paper trading

If one is intent on buying shares oneself, it’s important to educate yourself and follow economic and financial news, so that you are confident in your abilities prior to investing in the stock market. Once at this point, try paper trading first – write down the amounts of shares you would have bought at a particular price, and then when and at what price you would have sold. Do this a few times, and you should get a fair idea as to whether you are ready to risk real capital or not.

Learning from the experts

Gaining confidence in your own investing abilities takes time and a lot of reading. Look at how successful investors have made their fortune and try and glean practical lessons for your own investing. Follow how the market predictions of certain experts pan out to see who has the most reliable advice. You need to be confident in your own abilities, if you are to invest yourself. Beating a good managed fund’s performance is no easy feat and can also take up a lot more of your time.

Needs A Disciplined Approach

Buying shares yourself requires a lot of self discipline. The world’s greatest investor, Warren Buffett is prepared to patiently hold cash for years waiting for a great investment. While many other investors became overexposed to the stock market prior to the recent financial crisis, Warren Buffet’s renowned patience and discipline allowed his large cash holdings to be put to great use close to the low in the market. It is important to not be intoxicated by large rises in the stock market, as these do not continue indefinitely. Remember the slogan “Buy in gloom, sell in boom.”

Buying shares yourself concentrates one’s investment risks, or otherwise requires a reasonable amount of capital to sufficiently diversify one’s investments over several different shares. Investing in managed funds may be another alternative.