A Guide to Share Trading
By Dale Gillham |
Have you always wanted to get into the share market, but not really known where to start? Have you seen your friends and family make money, and wished you could have a piece of the pie? Well, we’re here to help you with our comprehensive guide to share trading.
Even if you only have a small amount of cash to invest, if you make some wise investment choices, you can get your money working hard for you and, in turn, give your bank balance the boost it needs!
By making consistently wise choices about which stocks to invest in, you can compound your returns and accelerate the growth of your portfolio. By doing this, you will be able to build up a nest egg so that you have more choices in life and retirement.
What follows is my 10 step guide to share trading that will ensure you succeed.
1. Do your homework
Don't let financial terms overwhelm you. The introduction of the internet, for the most part, has been a really big step forward for many of us. But it’s also known to cause overwhelm, conflict and confusion, particularly when it comes to finding answers to life’s issues.
Often the first place people visit in order to understand the stock market is the internet. But in my experience this causes a great deal of angst and frustration given that there is a lot of conflicting information and opinions about the best way to approach the market.
In fact, it can lead many down the wrong path, which I have observed over the past 30 years of trading. That’s because reading free information on the internet is not necessarily giving you the knowledge or education to ensure you achieve long-term success in the stock market.
That said, there are some great websites that can help you, particularly as you will come across a lot of fancy names and acronyms that may, on the surface, appear intimidating. But learning the industry jargon will help you become a more informed investor.
Wikipedia is a great resource that can support you in your journey, as can your local stock exchange which in Australia is the ASX. You can also register with an online broker or use financial dictionaries. The more homework you do, the easier it becomes, and over time you'll start to make sense of the plethora of news and information out there.
A good rule of thumb when it comes to learning about the stock market and doing your research is to understand that less is more. Therefore, it is recommended that you only ever rely on information and education from quality providers because a lot of free information is not always valuable. And remember, as the saying goes the price of what you pay is the value of what you get.
2. Go for a test drive
Before investing your own money in the stock market, I recommend paper trading a portfolio of stocks given that your emotional wellbeing (or your psychology) will play a significant role in your long-term success. Paper trading involves trading in a simulated environment where you practice buying and selling shares without risking your own money.
By going for a test drive, you’ll not only be able to test yourself but also how you go about trading and managing a portfolio, so you can prove to yourself you can do it. Knowing what works before you invest your money in the stock market can significantly lower your risk, while also increasing your overall profitability.
When paper trading, it is a good idea to select a small number of stocks to create a well-diversified portfolio. By including these stocks in a watch list, you can observe and monitor them on a weekly basis. You can also buy and sell these stocks based on your trading rules over three to six months to see how they perform and how well you did in managing them.
When investing in shares, it is also important to consider the amount you're willing to commit to each trade and the timeframe you'll be trading. In other words, are you looking to trade over the short, medium or long term because this will have some bearing on the stocks you select?
You also need to consider how you will manage your investment risk, as you need to ensure you do not take on too much risk and trade outside your comfort zone. You can do this by asking yourself how much you're willing to lose on each trade if a stock falls in value.
Understanding how to create and manage a portfolio are critical skills that everyone should possess if they want to profitably invest in shares. In my latest award winning book, I teach a proven, low risk approach to creating and managing a portfolio, as well as some simple but powerful investment strategies to buy and sell stocks that will enable you to Accelerate Your Wealth. It will also allow you to test drive your portfolio, so that you put yourself in the driver’s seat.
3. From little things big things grow
I’m often asked “how much do I need to get started”? Some say you only need a minimum of $500 to purchase a stock, but I would disagree with this, as you need to consider the cost versus the potential reward when placing a trade. Let me explain.
When buying and selling shares, you’ll pay brokerage to get in and out of a trade, so you need to balance these costs against the potential profit on each trade. For example, if it costs $50 with an advice broker to place a trade, this equates to 10 percent of your $500. Therefore, the stock needs to rise by 10 percent before you break even. Given this, I recommend using a minimum of $1,000 to purchase each stock, as you will avoid brokerage fees eating away your profits.
If you only have a small amount of capital to start trading, it’s recommended you develop a savings strategy so you can build up your portfolio until you hold at least five stocks. Once you hold a minimum of five stocks, you can begin to increase the amount of shares you hold in each stock.
If you sell a stock, reinvest the capital from the sale into another stock, as well as any savings you have accumulated, to increase the amount you are purchasing. Gradually your position size (the amount of cash you initially invest in any one stock) will increase, rather than the amount of stocks you own, which will ensure you are able to manage your risk.
4. Don’t become a day trading statistic
The irony is that most people seek out quick fixes, such as day trading to achieve their financial goals with the mindset that short-term gratification will fulfil their long-term needs. Many people are blinded by the instant gratification that the stock market offers, plunging head-first into highly leveraged markets using complex strategies in the hope of profiting from their efforts.
Sadly, many have lost their capital, or a substantial portion of it, trying to implement these supposed wealth strategies. As a result of these poor experiences, many do nothing or seek out advice from others believing this is their only hope of achieving long-term wealth. But is it?
The desire for quick returns in the stock market reminds me of a well-known children’s tale from Aesop’s Fable - you’ve probably heard the story of the tortoise and the hare. In this tale, the hare is impatient, cocky and willing to take unnecessary risks to win the race. The tortoise, on the other hand, is happy to plod along at a steady and consistent pace. And we all know who wins the race?
Unfortunately, I have met thousands of individuals who adopt the “hare” approach to trading. When I ask what returns they’re getting on an annual basis, more than ninety-eight percent claim they get less than ten percent. So what is the moral of the story?
Slow and steady wins the race! A slow but steady pace in regard to investing is much safer and far less stressful— both in terms of security (that is, the overall risk you take) and the potential financial reward.
5. Never put all your eggs in one basket
You've probably heard me say this before - it's important that you don't put all of your eggs in one basket, as this is like putting your money on the roulette table at a casino. It's very high risk, as you're putting all of your faith that this one stock will pay off handsomely, which is usually never the case. That's why it pays to diversify your risk across several stocks.
When trading shares, your aim should be to manage a concentrated portfolio of good quality stocks, which is why one of my golden rules to investing in shares is to hold between 8 and 12 stocks, as this offers a perfect balance between risk and reward. In fact, proper diversification will reduce your overall risk, while at the same time increase your overall return.
6. Be in it for the long haul
Creating wealth in the stock market is a journey, which means you need to be prepared to go the distance. While the market can be volatile, and everyone will experience periods of bull and bear markets in their lifetime, the trick is not to panic or react emotionally if your stocks dip in price, as this will impact the compounding effects of your portfolio.
A better strategy is to develop your trading rules as to how you will manage your portfolio and get into the habit of sticking to these rules. Compounding returns takes time and you don’t want to be out of the market when it’s rising just as you don’t want to be in the market when it’s falling. Believe me when I say, if you’re patient and consistent in the application of your rules, the market will reward you handsomely.
7. Trading for profit
While on an intellectual level everyone understands they can lose money in the stock market, most never believe it will happen to them. But it’s critical to your long-term success that you acknowledge early on the inherent risks involved in trading shares. This means recognising how far you’re willing to let the price of your stocks fall before pulling the plug.
Selling a stock at a loss is one of the hardest things you’ll ever do but it is essential to your overall profitability. In fact, the more comfortable you become at selling, the more you’ll make because trading for profit is about using sound money management rules and good exit strategies.
I teach investors and traders to decide on their stop loss target prior to entering a trade and to commit to it once they purchase a stock. A stop loss allows you to preserve your capital so you can play another day. My advice is to set your stop loss 10 to 15 percent below the price you paid for the shares, although this will be dependent on the volatility of the stock. If it falls below this level, you sell; no ifs, no butt’s and certainly no excuses.
The better your get at selling, the more money you’ll make. Applying good money management rules will also separate you from those who gamble in the stock market.
8. Play with your head not your heart
Donald Trump famously stated: “It’s not personal, it’s just business”. In other words, it is about making money and not about feelings and friendships.
The same rings true in the stock market. Having emotional ties to a stock because you like the company or use their products is not a good reason to buy it. That’s because trading the stock market is, first and foremost, about making money. And to achieve better than average returns, you have to concentrate on assets that are rising in value and increasing your wealth. Therefore, I strongly recommend you play with your head and only invest in stocks that you believe are rising in value and have the potential for growth based on solid research.
9. Do it online
Donald Trump famously stated: “It’s not personal, it’s just business”. In other words, it’s about making money and not about feelings, and friendships.
The same rings true in the stock market. Having emotional ties to a stock because you like the company or use their products is not a good reason to buy it. That’s because trading shares is, first and foremost, about making money. And to achieve better than average returns, you have to concentrate on assets that are rising in value and increasing your wealth.
As such, I strongly recommend you play with your head and only invest in stocks that you believe are rising in value and have the potential for growth based on solid research.
10. Get serious: remember it’s your money, your choice
It’s pretty common for people to become interested in trading shares because a friend or associate is dabbling in some form or another. The unfortunate reality with this is that the uneducated are going to others who are also largely uneducated in the hope of understanding what to do. While there is an old saying that two heads are better than one, if both don't have the proper education, it can become rather unsavory - because it's like the blind leading the blind.
A wise mentor once said if I want to learn how to make a million dollars, then all I need to do is find a millionaire and do what they do. Yet the majority seem to play the game of those who are broke, by surfing chat forums and watching YouTube videos in the hope they'll magically turn themselves into the next Warren Buffett.
But isn’t it time you got serious. The stock market is not a game to be played when your goal is to make money. Why? So you can have more control, a better lifestyle, retire wealthy, help family among many other reasons, all of which are great, worthwhile goals.
The reality for many, however, is that they treat the stock market like a game of chance but probability suggests that those who play are unlikely to achieve their goals. As the old saying goes, wealth is the transfer of money from the uneducated to the educated, although from experience, I believe it would be better put: Wealth is the transfer of money from the misinformed to the informed.
If you’re ready to put in the time, effort and resources to gain a quality education, and develop a solid plan of attack as to how to approach the stock market, you’ll be able to achieve your goal of profitably trading shares. So if you are serious, I encourage you to learn how our clients are kicking their goals in the stock market by viewing their reviews and success stories.
Others who read this article also enjoyed reading:
- The Laws of Wealth Creation
- Protect Your Portfolio from a Stock Market Correction
- Achieving Financial Independence
And if you would like to learn how to trade the share market so that you consistently profit, review our accredited trading courses.