A Guide to Share Trading

Dale Gillham, Chief Analyst and Head Trainer of Wealth Within

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.

Young lady trading shares

Even if you only have a small amount of cash to invest, if you make 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 can build up a nest egg to have more choices in life and retirement.

I'm sharing my 10-step guide to share trading that will make sure 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 finding answers to life’s issues.

The internet is often the first place people visit to understand the stock market. 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 online does not necessarily give you the knowledge or education to ensure long-term success in the stock market.

The best investors are informed

There are some great websites that can help you, particularly as you will come across many fancy names and acronyms that may appear intimidating on the surface. However, learning the industry jargon will help you become a more informed investor.

Wikipedia is a great resource that can support 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 money in the stock market, I recommend paper trading a portfolio of stocks, given that your emotional well-being (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 money.

Man test driving share trading

By going for a test drive, you can test yourself and how you trade and manage a portfolio to prove you can do it. Knowing what works before you invest your money in the stock market can significantly lower your risk and increase your overall profitability.

Build a watch list and back-test your trading strategy

It's better to focus on a few select stocks when paper trading to create a well-diversified portfolio. By including these stocks in a watch list, you can observe and monitor them every week. 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, you must also 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 will lose on each trade if a stock falls in value.

Understanding how to create and manage a portfolio is a critical skill everyone should possess if they want to invest in shares profitably. In my latest award-winning book, I teach a proven, low-risk approach to creating and managing a portfolio and 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 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 must 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 per cent of your $500. Therefore, the stock needs to rise by 10 per cent 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.

What if I only have a small amount of capital?

If you only have a small amount of capital to start trading, you should develop a savings strategy to build up your portfolio until you hold at least five stocks. Once you hold a minimum of five stocks, you can increase the shares in each stock. 

If you sell a stock, reinvest the capital from the sale into another stock and any savings you have accumulated to increase the amount you purchase. 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 can manage your risk.

4. Be the success story, not a day-trading statistic

The irony is that most people seek 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?

Slow and steady wins the race!

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. Conversely, the tortoise is happy to plod along steadily and consistently. 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 annually, more than 98 per cent claim they get less than 10 per cent. So, what is the moral of the story?

Slow and steady wins the race! A slow but steady pace is much safer and far less stressful— both in terms of security (the overall risk you take) and the potential financial reward.

5. Don't 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 increasing your overall return at the same time.

6. It's worth the wait

Creating wealth in the stock market is a journey, so you must 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 that if you’re patient and consistent in applying your rules, the market will reward you handsomely.

7. Know when to pull the plug!

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 the inherent risks of trading shares early on. 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.

Apply stop losses to protect your capital

I teach investors and traders to decide on their stop loss target before entering a trade and to commit to it once they purchase a stock. A stop loss allows you to preserve your capital to play another day. My advice is to set your stop loss 10 to 15 per cent below the price you paid for the shares, although this will depend on the stock's volatility. If it falls below this level, you sell; no ifs, no buts and certainly no excuses. 

The better you 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

Light bulb moment for someone share trading

Donald Trump famously stated: “It’s not personal, it’s just business”. In other words, it is about making money, not feelings and friendships.

The same rings true in the stock market. Having emotional ties to stocks because you like the company or use its products is not a good reason to buy it. That’s because trading the stock market is, first and foremost, about making money. 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. The smart choice: Using an online broker

There are many ways to buy and sell stocks, such as advice brokers who you can call or online brokers who provide you with support. There are also discount brokers who offer execution services only. 

Unless you have a large portfolio, I recommend using an online broker, as they help keep your costs down while providing access to information and support if you need it. While there are many online brokers to choose from, you may want to use the brokering arm associated with your bank, as you already have a relationship with that organization.

10. Get serious: It’s your money!

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 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 unsavoury - because it's like the blind leading the blind.

A wise mentor once said that if I want to learn how to make a million dollars, 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, hoping they'll magically turn themselves into the next Warren Buffett.

In the end, it's all about making money

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, and help your 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, 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:

And if you would like to learn how to trade the share market so that you consistently profit, review our accredited trading courses.

#1 Leader in Stock Market Education

Invest in yourself. Study with Wealth Within now to fast track your stock market education and begin the journey toward financial freedom. Because lifestyle matters!

Learning Centre

Learning Centre

Talking Wealth Podcasts

Market Report Videos

Stock Market Show