Nick McDonald: Consideration for those new to the sharemarket

Can you afford to lose the money you invest? File photo /NZ Herald

Nick McDonald, who teaches new investors about financial markets and trading, with some things to think about around the Mighty River float.

Last week I discussed two aspects for new stock market investors to consider - market crashes and yield versus capital growth. Here are a few more pointers for newcomers to stock ownership.

Why am I buying XYZ Stock?

Since so many Kiwis are currently either considering or have just purchased Mighty River Power (MRP) as their first ever stock market investment, it makes a good case to substitute XYZ with MRP. But the same question applies with any other company name and should be answered before any stock investment is made.

The New Zealand stock market consists of numerous household names such as Auckland Airport, Air NZ, Fisher & Paykel, Hallensteins, Michael Hill, Pumpkin Patch, Trade Me, Telecom and the Warehouse. The list could go on and these are just some of the names you are bound to know. We have some great publicly listed Kiwi companies!

So the question comes up again... why are you considering Mighty River over all these other names and more?

I don't ask this question to suggest that someone should invest or not - either way the 'correct decision' for the individual is the best one. I only ask so that people can become very clear on why they themselves are investing e.g. Is it simply because of the media attention? Is it because it is Kiwi owned? Is it because the Government is involved, which feels safer? Is it because it has been made so easily accessible which makes it a simple first step to share ownership? Is it because your friends or family are investing so you don't want to miss out on the action?

There is no right or wrong answer; everyone will be investing for different reasons. Have a good think about what you are trying to achieve with your investment and if you are unclear, consider talking to a licensed stock broker about what to expect from the markets and if there are any other options you might consider. There is nothing wrong (and in fact everything right) with conducting a bit of research to reinforce your investment decision! For those new to the markets, this is usually a fun and enjoyable learning process that is well worth doing.

Can you afford to lose the money you invest?

A simple investment rule - don't invest money you cannot afford to lose. Never make the mistake of thinking any investment is a sure thing. Not only are stocks not sure to return a profit, they are also not certain to return your initial investment. Of course profit is the goal but there is only a reward for those who take, accept and manage the risk. One simple way to do this; never put money in the market that you could not live without.

Don't Watch!

I remember the first time I bought shares as an investment... not only did I check the closing prices daily in the newspaper but I could barely resist checking the daily movements on a more regular basis at any chance I got. Thanks to the internet this had become very easy to do whenever seated at a computer. This can become addictive, distracting and let's be honest, a bit disturbing! If you think that you will not watch the market like that but you have never invested before then don't be so sure... the green and red lights of the stock market have a certain addictive allure to them.

I suggest that you make a decision now - if your Mighty River/XYZ shares are a long-term investment, which for most Kiwis they likely will be - don't watch every tick of the markets. It creates an unnecessary roller coaster of emotions and often leads to exiting a long term investment too early and for no good reason.

One of the first rules of investing in the markets is to have a plan and stick to it. This brief article along with a few more pointers in last week's {hyperlink} has by no means given you a complete plan for investing in Mighty River shares but hopefully it has given you a few things to consider and start committing your personal investment plan to writing.

What topics would you like covered in future articles? Ask me anything you want on the markets and I will do my best to put it into simple terms for those new to the markets.

Nick McDonald heads up www.tradewithprecision.com a global company teaching everyday people how to become a trader in the world's financial markets.