The Beginner’s Guide to Investing

Bargain hunting for stocks in a bear market? Here are some tips before you invest

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As global markets log some of their sharpest falls in history amid the coronavirus pandemic, some investors have been taking advantage of rock-bottom prices by buying certain stocks. 

Major stock markets have been see-sawing for weeks as market participants buy and sell on the ever-changing newsflow. The Dow Jones Industrial Average and pan-European Europe Stoxx 600 indexes went into a free fall last week, and on Wednesday the former fell 6.3% to close below 20,000 for the first time since February 2017. 

The drops have spurred some investors on online trading platforms to attempt to "buy the bottom." 

U.K. platform AJ Bell's data showed that purchase volume of securities in March is three times greater than sales, with oil giants Shell and BP among the most bought stocks on the platform on Tuesday. Both stocks have fallen dramatically in the past week due to tumbling crude prices. Rival platform Interactive Investor said more than two-fifths of its users were increasing their stock market exposure, according to a poll of 2,295 users conducted March 11-16.

Nevertheless, experts recommend keeping in mind these principles when embarking on your own bargain hunt for stocks. 

Invest in what you know

Rebecca O'Keeffe, head of investment at Interactive Investor, points out that the same fundamentals of investing still apply "even in crazy markets." 

She advised investing only in what you know, as well as trying to maintain a diversified portfolio. 

O'Keeffe said that while a stock may look attractive after having fallen 20%, investors should read the relevant news and get a "wider picture" of the company to make sure they are comfortable with the investment. 

"It can be easy to get sucked into investing simply because prices are so much cheaper than they were last week, but you still need to be happy to own anything you buy — even if you do intend for it to be a short-term investment," she told CNBC. 

Laura Suter, personal finance analyst at AJ Bell, suggested monitoring company and stock market announcements, including financial updates or results, with key announcements usually found on the "investor relations" section of a business's website. She also recommended keeping an eye out for interviews with key people in the business.

Look for red flags 

It is important to differentiate between companies that have seen their share price fall too far as a result of everything being dragged down in market panic, and those that had sold-off because they faced large headwinds from the coronavirus, Suter added. 

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, said investors should "seek out 'babies that have gotten thrown out with the bath water.'" 

In a research note published Tuesday, he highlighted the old investment adage "buy low, sell high," explaining that "times like these have often proven in hindsight to have presented great opportunities for investors." 

In order to identify undervalued stocks, Suter said investors should consider how much the coronavirus crisis will impact the company now and in the future, as well as its financial stability. 

She also urged investors to consider whether a company's business model puts it in a better position to weather the crisis, or if its "prospects are substantially (or even permanently) compromised by a downturn." 

Red flags include firms carrying a lot of debt or those that are considered to be a very "cyclical" — a business that's highly affected by the condition of the economy. 

"There are lots of rumours … about the market at the moment, and the worst thing you could do in the current market is take a punt on a stock that your friend told you was a sure thing without doing your own research," she said. 

Avoid overtrading 

Suter warned investors also avoid "overtrading" — excessive buying or selling of stocks — as given continued uncertainty, it can become expensive to keep moving around a big percentage of an investment portfolio, because each time you make a trade you're usually charged fees. 

She added that investors should therefore make sure changes to their investment portfolio are for the long term and not for a few days. 

"Chopping and changing can mean you quickly rack up lots of trading costs, which will eat into any returns," Suter said.

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