For stock market beginners, a crucial decision is just how much time they are able to invest regularly - in other words weekly - into their profit seeking adventures.
On the face of it, investment is a passive activity. Once stock has been purchased in a corporation, the owner simply has to decide to hold or to sell. Unless something drives the owner to sell, the default choice would therefore be to hold. That does not sound like a lot of work. However, unless active monitoring of some kind happens, how will an investor ever know when to sell?
This may sound like a little work, after all monitoring the health of a holding might only take three minutes each week. That isn't so hard at all. But, if the investor happens to build a portfolio of - say - 10 to 15 companies, that three minutes each week is suddenly 45. And the investor now needs to follow some outline market and sector news as a minimum. Voila! Suddenly our intrepid investor needs to spend more like 2 hours each week.
Again, this doesn't sound like a huge chore. But once annual reporting season arrives, there will be quarterly, half yearly and annual reports to read, analyst ratings when you can get them, dividend checks to pay in and tax returns to think of. This is starting to sound much more serious.
This means that from the outset, an investor needs to
decide whether he - or she - plans to be active or passive. In contrast
to the above, a passive investor would normally choose 1 or 2 collective
funds (mutual funds or unit trusts) and take positions the easy way.
This strategy means that there will now be a fund manager somewhere
whose job it is to worry about annual reports, asset allocation and risk
ratios. This sounds much easier!
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Conventional wisdom in the investment world tells us that beginners to the stock market should start their investment careers by using investment funds rather than direct holdings. The thinking is that new investors often are not in a position to take big risks and therefore need the safety through diversification that a fund offers.
Newer investors are often not as knowledgeable as they perhaps ought to be and it is also thought that funds offer nice and easy ways to start learning about the stock market without needing to be an expert. One last - and very important reason - is that most funds will allow relatively modest monthly purchases whereas individual stocks require a one-off lump sum. Being able to purchase each month also reduces the risk that a purchase may simply be made at a bad time.
Therefore, no matter what your thoughts may be, there is a lot of investment wisdom that tells us that beginners to the stock market (read here) ought to start out by finding one or two funds in which to invest and therefore gain some limited exposure to the risks and potential rewards of stock market investing.
Who knew that your available spare time could be analysed in such detail?
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