Investing in shares: 9 essential tips

Discover 9 essential tips to maximise financial returns and minimise risk when investing in shares. 

There is no magic formula for investing in shares – and be wary of anyone who says otherwise. However, there are best practices, analysis methods and structured approaches that can help select a portfolio that is right for each investor. Discover 9 essential tips for investing in shares. 

1. Define your investment objective

Start by defining a clear value that you want to achieve with your investments. This goal can vary from person to person and may include short-term goals (such as initial capital appreciation), medium-term goals or long-term goals (such as preparing for a more comfortable retirement).

In this step you should consider the timeframe in which you want to achieve your goal, the capital required to achieve it and the level of risk you are prepared to take. It is also important that the goal is realistic and achievable, taking into account your financial situation. Once you have defined your objective, you will be able to select the most appropriate investment products. 

2. Assess your risk tolerance

Before investing in shares, it is important to assess your risk tolerance and determine how much you are willing to lose on a particular trade. This step is essential to help investors set realistic expectations and make investment decisions that are in line with their financial and emotional goals.

Investor profiles at Banco Carregosa 

Conservative

• Seeks returns over time, not necessarily very high, but guaranteed;

• Values peace of mind, delegating asset management decisions or setting up a low-risk, no-volatility product;

• Preferred products: Term deposits, , money market funds and structured notes with capital guarantee.

Moderate

• Seeks medium-term returns;

• Values the security of professional help, but monitors and increases their level of knowledge;

• Preferred products: Notes and other structured products.

Dynamic

• Seeks high returns and risk;

• Values making decisions independently or delegates their investments in volatile solutions.They are knowledgeable and informed;

• Preferred products: Shares and bonds.

Consider how different market scenarios could affect your portfolio and the financial and emotional impact of potential losses. For example, a younger investor with a long-term investment horizon and a stable financial situation may be more willing to take risks. 

3. Choose the type of shares

This step can be challenging, even for experienced investors. If you're taking your first steps into investing in shares, look for stable stocks with a good track record and steady growth potential. Here are some examples of different types of shares:

Blue chips

Blue chips are shares in large, well-established and financially sound companies, such as the largest companies listed in the S&P 500. They tend to be sector leaders and are generally the most stable. 

Shares that pay dividends

If you prefer recurring income, you could choose companies that pay regular dividends. These companies can be a good choice because they pay out regular income that can be reinvested to buy more shares. However, if you're investing for the long term, remember that dividend payments are not tax-efficient.

Defensive stocks

These types of companies – public services, healthcare and consumer goods - tend to perform well even in times of economic recession. They can be an important buffer against volatility. 

ETFs

ETFs are traded like shares and track specific market indices, such as the S&P 500. They are an affordable way to gain exposure to different types of assets, providing instant diversification. 

4. Analyse the track record

Track record analysis involves assessing the intrinsic value of a share based on the economic and financial fundamentals of a company. Before making investment decisions, it is important for investors to understand a company's financial health, past performance and future prospects. Dedicated platforms, such as the S&P500 Index, allow you to consult the track record of the major indices in real time.

Some of the main baseline indicators are sales, profits, margins, debt, industry growth and the quality of the company's management. By evaluating metrics such as price/earnings, debt/equity and sales growth, investors can make more informed decisions about which stocks to include in their portfolios. Over the long term, share prices tend to reflect a company’s underlying fundamentals. However, this analysis does not guarantee results and is most effective when used over the long term.

5. Diversify your portfolio

Portfolio diversification is an important risk reduction strategy when investing in shares. Spreading investments across different assets, sectors, geographical regions and types of financial instruments helps to reduce exposure to the risks specific to any one company or sector, and can mitigate the negative impact of unforeseen market events. This provides overall portfolio stability by allowing the negative performance of one investment to be offset by the positive performance of others. 

Of course, the way in which a portfolio is built will affect its return potential and its exposure to market volatility. It's important to ensure that your portfolio is diversified, with a mix of riskier and less risky products to suit the profile of each individual investor. 

6. Use stop-loss orders

A stop-loss is a sell order that is automatically triggered when the price of a stock reaches a certain pre-defined level, helping to limit losses on a trade. The use of stop-loss orders allows investors to set a maximum acceptable loss level for each position, reducing the risk of large losses.For example, an investor may choose to set a stop-loss at a certain percentage below the purchase price of the share, such as 5% or 10%. In addition, investors can adjust the stop-loss level as the position increases in value, either manually by changing their orders, or by using trailing stop orders, where the stop-loss level is adjusted automatically as the share price rises.

For example, if the price of a share rises by 10% and the investor has set this variation in the trailing step (the value that allows the stop order to move), the stop loss order will automatically move by the same proportion as originally set. 

7. Reinvest dividends

When a company pays dividends to shareholders, investors can reinvest those dividends to buy more shares. Over time, the power of "compounding returns" comes into play, as reinvested dividends generate more dividends, which are reinvested to buy more shares, and so on.

8. Be disciplined

Investing in shares means knowing how to deal with market volatility. A patient and disciplined approach is essential as significant returns are not usually achieved overnight. Instead, investors need to focus on their long-term goals and resist the temptation to react emotionally to market fluctuations. 

9. Seek professional advice

Even if you have experience of investing in shares, it is always important to seek professional financial advice to help you allocate your assets wisely and develop a long-term investment strategy. This will increase your chances of success in the stock market. 

As well as helping you choose the best investments, advisers can also help you set goals, create a budget, manage debt, plan for retirement, maximise tax benefits and much more. 

Banco Carregosa, specialists in investing in shares 

Investing in shares can be challenging due to the constant fluctuation of markets, economic developments, political changes and world events. However, these tips can help you make informed decisions. Contact the team of experts at Banco Carregosa for personalised advice.