The question of why we invest seems trivial. The answer will always be the same – to earn more money. But do we really know what investing entails? Not every investment will end in profit. Therefore, you should always take into account the risk of failure when investing. Investments will not always bring profit in the time we expected. Many investments planned for a year or two are successful after five or more years. It may happen that the invested (and “frozen”) money will be needed earlier than it resulted from previous plans. There may be various reasons: another opportunity will arise, or we will need cash to meet various obligations. Often the decision to withdraw money from the investment will have to be made at the wrong time.
Why do I invest?
Most people invest to make more money. This is the basic definition of investment and investing. We hope to gain more than we had at the beginning. Some of us do it professionally, some amateurly, but almost all our lives we have been looking for various opportunities and opportunities. Investing in the stock market, investing in stocks is one such opportunity. Often, the adventure with the stock market is started out of curiosity.
Sometimes amateur investing turns into something much more, it can even be an introduction to a professional career on the capital market.
Still others treat the stock market as another opportunity to make additional profit. Perhaps they already have experience in the real estate market, forex or other types of investment or business.
Regardless of whether we approach investing as an amateur who is looking for a good place for their financial surpluses, or as a professional, the right rules should be applied. These principles assume, among other things, the protection of one’s own capital. What does that mean? Investing is inherently associated with the risk of loss. We have to prepare for the fact that not every transaction will end in profit. However, our goal is to make decisions in such a way that profitable transactions bring more than losses. How these profits are made is also important.
Imagine that in 9 out of 10 transactions you earned $1000 each. And then there was one transaction that brought a loss of 15 thousand. As a result, after 10 transactions, most of which were profitable, you are 6 thousand zlotys in the red. And now the opposite situation. Within 9 transactions you lose 1000 zlotys each. In the tenth you earn 15 thousand. In total, you gained 6 thousand.
Such situations really happen! One too large loss that the investor allowed can cancel out many smaller profits. On the other hand, if an investor tries to protect capital and quickly closes unpromising investments (with small losses), his profits will flow from the few successful ones. We will write more about this in lesson 7.Most of us invest for profits. Maybe some people want to prove to themselves that they predict the future, that they know how the stock market works, that they want to boast about good hits. But above all, it’s about profit. Often, the desire for this profit can obscure our common sense (Lesson 8 – Know Yourself).
Above all, however, it is worth remembering that to start investing in shares on the stock exchange, you do not need large capital outlays (as in the case of real estate) and time spent.
What are my profit expectations?
There are a lot of myths associated with investing in stocks. People usually start to be interested in this form when the shares are loud in the media. During the so-called bull market, i.e. a long-term and strong increase in prices, shares may gain a dozen or even several dozen percent. This awakens imagination and expectations. Similarly, during a bear market, when the share prices of most companies fall and investors can lose significant amounts of invested capital.
Stock markets move in cycles that are in a sense a replication of the behavior of the economy. During a good economic situation, share prices rise, during a bad economic situation they decrease. When starting your adventure with investing in shares, you should be aware of this. Although high profits are possible here, we will not always be able to buy those shares that will only grow. Sometimes our decisions will concern companies whose shares are losing value, which will mean losses. What’s more, there is no such technique that only allows you to make money on the stock market. In this case, the same principle applies as in business, you lose on some investments, and make money on others. The final result of many of our investments is important.
The measure of the behavior of the stock market is stock indices. There are several of them on the Warsaw Stock Exchange. The index covering the entire market is WIG. From its inception in 1991 to 2018, the average profit shown by the index was about 16%. This includes changes in prices and dividends paid by companies. However, the average does not show individual decreases and increases. The fact that in one year prices can rise by 60 percent, and in another fall by 50 percent.
Our expectations for possible earnings from equities should take this data into account. Double-digit profits are possible to achieve during the year, but on average. It may vary from year to year. The real average annual expectations are 7-15 percent if we take into account the broad market. Which does not mean that it will not be different in the case of individual investments.
During a bull market, when most stocks are growing, some will grow more dynamically, others less. And still others may even fall. Similarly, in a bear market, most stocks will experience declines, but in some cases they may be very strong, in others weaker, and a small handful of companies may even grow against the general trend. The behavior of companies depends on what industry it is, whether the company is small or large. Is it a dynamic business with huge prospects and profit expectations (e.g. technology companies), or is the company a huge, mature business, in the case of which most investors do not expect spectacular increases in profits, but their systematic growth.
In 2017, the WIG index gained 23 percent, out of 483 companies listed on the WSE, 245 generated a profit, and an investment in the remaining 235 ended in a loss. The shares of DEKPOL grew the most, gaining 260 percent, while PBG lost the most, as much as 93 percent. This is what the stock market is like.
What losses am I willing to accept?
The consequence of changes in stock prices on the stock exchange is that not every investment will end in profit. There will be those on which we will suffer a loss. Maybe even losses will occur several times in a row. During a bear market, most stocks fall, even if individual companies do better than average. The volatility of stock prices means that the risk of loss is very closely related to investing.
It usually happens that the shares of young, small companies can grow strongly. This is one side of the coin. They may also experience sudden collapses when it turns out that their plans have failed to the end, or for some reason they have ceased to be valued among investors.
Each investor has a partial impact on the risk of their portfolio, i.e. the money invested. He should determine his “pain level” early enough, i.e. the acceptable possible loss on a given investment. It can be 5, 10, 15 or even 30 percent. There is no golden rule here, because it is an individual approach of each of us.
In many cases, this pain threshold will be associated with the chosen approach to investing. Very fast, the so-called day-traders (buyers and sellers of shares during one session) can set limits very close, because during the day price volatility is limited.
On the other hand, long-term investors – intending to hold shares for many months – should set the maximum permissible loss at at least a dozen or so percent.
However, it should be remembered that the choice of technique is associated with many aspects. Day-trading requires an almost constant presence at quotations, concluding many transactions and being satisfied with a small profit. When investing for the long term, we do not have to spend so much time assessing the market, monitoring it, we can take into account companies that pay dividends.
How much can I invest?
First of all, due to the risks associated with investing, it should be remembered that money for investments should be allocated in a thoughtful way. It should not be money from credits or loans. These should not be our savings, which are intended for a “rainy day” or for a specific purpose (e.g. buying a car in 10 months). The money invested should be free of burdens like: in a month I will need it. Investing in shares can start with really small amounts (even PLN 100). Many shares cost a few zlotys. However, in such a situation, it should be remembered that the proportionally high costs of commission and restrictions on access to shares of many companies, the prices of which can be several dozen or even several hundred zlotys per piece. A reasonable way to start is amounts of several thousand zlotys. Thanks to this, we can build a portfolio of several investments (see Lesson 7 – Diversification), and in addition, unsuccessful trades that bring losses will not be so painful if our portfolio is diversified.
How much time can I devote to investing?
Investors can devote hours to investing. It’s not just about looking at the quotes and looking for opportunities. It is primarily a time to read analyses, review information, constantly learn and improve. Depending on the method and expectations, the stock market can resemble a full-time job (day-trading) or just an additional way to make profits.
Many investors spend an hour a day or even an hour a week. He makes statements, summarizes transactions, plans new investments. In many cases, these are routine activities that end with placing orders.
Naturally, as you gain experience, this time can shorten. At the beginning, when the investor is constantly learning and trying to learn as much as possible, this time may be longer.