Fundamentals of investing
As a beginner, the most important point to know about Investing is it can be unpredictable. It is not like having your money in a bank account where if you have £1500 invested, you know that when you need that money it will be there waiting for you plus interest (make sure bank backed by FSA).
As you become more experienced with the type of investing of you wish to partake in, you will find that investing becomes more and more reliable as you will know the signs, when to get in and out of the market and you will find a formula for investing that works for you.
4 Important DOs BEFORE investing your money
1) Only invest as much money as you can afford to lose
2) Study sector price patterns
3) Learn the ropes before diving in
4) Form a plan - aim, strategy, know your entry & exit points
1) Only invest as much money as you can afford to lose.
Certainly until you become more experienced at what you are doing. Sticking to this rule will also help you to remain sensible and not panic when the markets are going against you. (Psychology is a very important part of investing as you will see later)
2) Study sector price patterns
It is a good idea to study the charts of a sector so that you can see and understand that even a sector that is in a long term uptrend does not go up in a straight line. This will also help with remaining calm & clear focussed when markets move suddenly.
In this graph of the gold spot price we can see that in the long term the price is moving up, from $500 in Jan 06 to $1250 in Sep 10. (150% increase). However along the way we can also see several dips in price, the biggest being Mar 08 to Oct 08 when the price went from $1000 to $700. (30% fall) However this dip was followed by a rapid up back to $1000 in just 4 months. (45% rise)
Even within 1 trading day the price can vary immensely especially on a day when there is a rapid fall or rise in price.
3) Learn the ropes before diving in.
Decide a strategy when you are calm and stick to that strategy. More on strategy later. Paper trading before you even put any money in the market is a good idea too. To this you can use the www.advfn.com portfolio screen to 'pretend buy' the shares you are interested in and watch their progress. You can set up for a free account to do this.
4) Form a plan
There are many different types of Investment and they all have the potential to make you money or as the phrase goes 'have your money work for you'. However they could just as easily lose you money. Two investors could be investing in gold at the same time and one constantly making a loss while the other constantly makes a gain.
The key ingredient is the investor (that is YOU) & their plan. Here we will only focus on investing on gold & silver but you could choose to invest in property, stocks (shares in companies), bonds, the list goes on . .
Your plan = This should include your aim, strategy & timing.
Aim
Firstly you need to know what you are trying to achieve.
Do you want monthly income? Are you trying to increase your net worth for your retirement or for security? When are you going to want this increase in capital by?
Strategy
Do you want to invest for the short term (days), medium term or long term? How much time do you want to spend maintaining your investments/ studying graphs and data to monitor your portfolio? How long can you invest your money?
Investing in gold is generally considered a long term investment so as long as the overall trend is up, you are fairly safe to invest with little maintenance. Although pay attention for that trend changing!
You can invest in gold short term for capital gains / income and play on some of the short term movements of the gold and silver price. The best way to do this is through ETFs as mentioned in section 3_How to Invest in gold.
Market sector
Unless your strategy is short term, you are most likely going to want to invest with a sectors long term trend so if the trend is up you invest with the intention that the price is going up. That way even without careful monitoring the price will still hopefully go in the right direction
Timing - This is the more tricky part. Most uninformed or new investors wait until they are sure of a particular sector going up and by this point the market is generally reaching its peak. Eg. US Housing bubble of 2006 & stock market crash of 2001
As a more educated investor you want to get into a sector before the general population has caught on. For gold and silver that time seems to be now.
Resistance & support levels are a good way to know when its a good time to enter the market.
Support - is the level where the price generally falls to before reversing back up again (marked by red line on graph below). If the price fell much below this point, educated investors may decide that the trend is reversing and sell their shares to get out of the market & protect their profits/losses. This can also be a very good point to get into the market as the price often goes back up quickly from here.
Resistance is the level where the price tends to rise to before falling back down (marked by green line on graph below). In a long term up trend this point will gradually rise (as seen on graph below where resistance was broken in Sept 2010 and we have yet to find the next resistance point). In a long term down trend this resistance point will gradually get lower.
Many short term investors will trade between the support and resistance points as they are a fairly sure thing (as long as trend not changing - remember in investing always have a backup plan in place.
Return to TopSo next most important point is:
Know your entry and exit points before entering a trade
For example you may decide to enter a trade just above the support level. In the above graph you can see the support level is rising so the price may not come back to the $1150 level. Therefore you could decide that you are happy to get in at $1250 and will leave your money there until you have earnt 20% profit (if you were investing short term). Perhaps the most important point as a beginner is deciding at what point you will exit if the price does go against you - so you protect your capital. As the support point is currently $1150, a wise level may be $1095, which means if the price does reach this level you assume the current long term trend has reversed and will sell.
This is important because so many people stick with a share hoping it will go back up and it ends up going from 50p to 5p or as the case of the gold price in the 80s - if you had bought into gold at the peak of $800, it would have declined all the way to $250 over the next few years. A 65% loss not including inflation. Not good! Cutting your losses at an appropriate point is important so you still have money to invest in something more promising. Choosing the appropriate sell level is important though. You don't want to be jumping in and out of the market too often and all your profits eaten up by commissions. The stop loss is your all important back up plan for if the trend changes.
The beauty of ETFs traded by a dealer is that you can set this sell price to action automatically if the price is reached (this is called a stop loss). How to set up a dealing account to trade ETFs.
One final point is gold and silver are traded in US dollars. However you are likely to buy it with your home currency so exchange rates will impact your purchase also. It is worth being aware of this.
In Sept/Oct 08 the gold price had a steep fall from $900 - $700. The £ price mirrored this fall a little from £550 to £450 however due to the £ weakening against the dollar the £ price rose rapidly over the next few months. (The £:$ exchange rate went from 1:2 in Aug 08 - 1:1.4 in Jan 09)
Staying calm, Keeping your head
If you have made your plan with a clear head and have a back up plan in place, it will be much easier to stay calm and logical if the market does turn and everyone around you is losing their head. You will save alot of money by not panic selling and only acting on your carefully thought out plan.
Most importantly stick to your plan UNLESS your alterations are thought through when you are again thinking clearly.
For more information about trading strategies & trading pschology I recommend the The Naked Trader: How Anyone Can Make Money Trading Shares
Good luck and I wish you a happy, secure future
