Buying shares is not like a trip to the supermarket to buy groceries. For several reasons:
- Buying shares is not necessarily a user-friendly experience. Even new investing platforms use some technical terms and assume a minimum level of knowledge of their users.
- When you buy shares, you buy them from another investor, not the company itself. This means that there is no ‘sales team’ or ‘customer service’ on behalf of the actual company you are buying shares in, to answer your questions about the shares.
- You have to perform your own research and while your stockbroker can probably help you with some questions, they will be unable to offer advice without you formally paying for financial advice, as regulations would prohibit this.
What can happen if you buy shares with insufficient knowledge
Losses from a single company
Buying shares can go dramatically wrong if done incorrectly. For example, you may sometimes hear news articles about amateur investors losing a fortune when a single company goes bankrupt.
This is usually due to a failure on the part of the individual. They should have diversified their money across a wider range of shares, so that they were not so sensitive to the fortunes of a single business.
However occasionally this does not happen, and nobody is responsible for protecting an investor from this. The stockbroker nor the company being invested in, has a duty to intervene and advise the investor to do otherwise. This overlaps with my point above, but investing is a lonely activity – you can live or die by your own decisions.
Buying high and selling low
Without investing knowledge, you might be tempted to ‘play the stock market’ or ‘time the market’. Both of these phrases mean where you use your gut instinct (or data) to determine when is the appropriate moment to buy or sell your shares.
The objective is to buy low and sell high, this makes common sense as a way to make money on the stock market… until you do you research and discover that even investment professionals have found this virtually impossible to achieve over a long period.
In reality, timing the market is an exercise of luck, and does not carry a positive expected return, unless you are in possession of some unique information that can provide an edge over others.
But assuming this isn’t the case, only investors with limited knowledge possess the overconfidence that comes with naivety, to expect that they can generate profits by ‘buying the dip’ and ‘selling at the top’.
Incurring high investing fees
A new investor is quite susceptible to the marketing materials of investment companies. While no investment company will guarantee positive returns or superior returns (as this cannot be known in advance), they will still use suggestive language in their brochures etc that will help convince investors that their investments have an advantage.
Investors who have done their research will be able to look at the historic performance of that asset class over a very long period, and understand when the asset has performed well and when it has performed not-so well. This complete history will give some useful context to statements such as ‘We use our expertise to seek superior returns’. Once you’ve seen companies use this language months before their investment’s crashed through the floor, you may begin to treat such statements with a healthy degree of skepticism.