Once an investor decide to invest in shares, it is important that the investor determine:
- How much of earnings he should invest in shares.
- The kind of shares that you should buy.
How much of the earnings should an investor invest in shares ? It is important that the funds the investor set aside to buy shares are the amount that are available after he have met his needs. James is a salaried employee.He receives $5,000 every month after deductions. Out of his spends $1,200 on food, $400 on society outgoings, $1,000 on children's education, $200 on life insurance and another $800 on household expenses. Of this, he could use the entire amount or a portion to purchase shares.
However, it would be shortsighted to use one's entire disposable income to purchase shares because the possibility exists of large losses.An individual should ensure that there is money saved away or kept away for one's daily needs and for emergencies. Only that which is left over should be invested in shares.
The shares that an investor purchase must depend on the investor risk level - the amount you are prepared to leave a chance. If an individual are prepared to gamble his entire savings shares, he is obviously a born gambler and his capacity to take risks is extremely high. He is prepared to take large risks and make enormous gambles for windfall gains aware that he can lose his shirt should the gamble fail. The shares that he would purchase would be high risk shares which are extremely volatile.
On the other hand, if you are concerned about the erosion of your capital then it would be wise to purchase safe shares - shares which do not appreciate or depreciate widely and pay reasonable dividends. It must be remembered, however, that risk and returns go hand in hand. The higher the risk, the higher the returns.
This however does not mean that only gamblers take high risks. Fundamental investor, careful people do take gambles too, but these gambles are often after careful consideration and this is what one should always remember if one is to be successful in investing in shares.