"Reminiscences of a Private Trader –
Points to consider before Share Trading."
by Peter Benson
Share Trading can be an exciting and very prosperous business venture. However without good pre planning, starting your share trading business idea can be a very harrowing experience.
If you don’t do some homework, before you attempt to invest your hard earned money, losses could quickly occur without you realizing it. This can dampen your enthusiasm and confidence in the early stages.
Every new business venture starts with a great idea. You are full of enthusiasm, but often there is a very wide knowledge gap from the initial idea to realising your financial dreams.
In order to make this idea of yours succeed you need to develop a plan. No different to any other business you could think of.
To become a share trader there are a lot of checks you should tick off before you even contemplate buying your first parcel of shares. You want to be as well prepared as you can before you dip your toe in the big wide world that is the stock market.
I definitely did not do proper due diligence and paid for that mistake with hard earned profit made from my other business.
I began my share trading business in the late 1990’s when many other people with no experience were buying shares and making money.
I went off and bought a laptop and charting package the same day. I had a few lessons on how to set it up and how to create a watch lists of stocks. I then hooked up the laptop to good old dial up in those days and started watching every day.
I then rang a Broker and he showed me how to set up an account, and off we went. He recommended a few stocks that I should buy and I dabbled in a few of my own recommended stocks.
It was near the end of a rising share market. I began making money, probably because nearly all the shares at that stage were going up and it was not that hard to pick a stock and for the share price to rise over the next week or so.
“Woo Hoo this is great. I am a legend. This is how you make money!!!!!”
Well when the market finally rolled over I kept on buying shares using the same limited knowledge and methods and that’s when I started to get some scary losses.
I would look at the portfolio and valuations were dropping and dropping fast. I thought they were “good shares” so I just kept thinking that they will come back again soon. It’ll be ok.
Even my broker was getting me into shares that began falling not long after I had bought them. “He should know what he is doing”. I thought. So I kept his recommended shares as well.
Well the next six months was a very painful affair, and I finally realised I did not know what I should know about trading shares. So I stopped for a while and took a breather, not before losing money that I could not really afford to lose.
I re evaluated what the market was actually doing and how I was reacting to it. I then realized my decision making process was slow, especially when a positive trade turned sour. I did not have the right checks to quickly make a new decision to get out. Instead I often froze and could not cut a small losing position. So it became a big losing position before the pain made me sell out for a bigger loss that I should have allowed.
I have continued to learn and have been to a few share courses along the way, and learnt more about fundamental analysis and technical analysis. I’ve opened accounts with a few different brokers over the next few years, started more than one online trading platform, and tried a few different charting packages as well.
When I started I just had a dream (that someone probably told me) of how easy it is to trade and make money and retirement will be so much closer. But I did not treat it like a business and you have to have a plan.
If you want to be dentist, a doctor, a diesel fitter, you need to be educated before you can successfully apply your passion and make money. Share trading is no different. You need to educate yourself with all aspects of this new business venture you are contemplating.
The easy bit is buying the actual shares. But which company should you chose? At what price? When should I sell? How many should I buy? How much money should I invest? I could go on ………..
When I first started I let my broker make many of those decisions, as I thought he knows more than me. But he still lost money for me on many occasions, much more than I would allow a losing trade these days to go pear shaped on me.
Now, I am not knocking Brokers at all. They are professionals and they can be very helpful as a part of YOUR business. But at the end of the day, it is your money and YOU need to understand about where YOU are putting your money.
You can’t blame the Broker if it all goes pear shaped. He may not know the full story of your financial position. Only you do. So the buck stops with you managing your money.
Looking back now I made many aspects of starting a trading business backwards. I just “went in and had a go” and along the way as I made mistakes I learnt sometimes. Often I was making the same mistake over and over again with out realising where I was going wrong.
The biggest issue I did not address in the beginning was risk management, and capital management.
I had no real idea how to address this with a set of parameters when I first started. I also had a crack at warrants because they looked like they moved fast. Then options came along, and finally hedging shares.
Hedging is a bit like insurance for your portfolio valuation, like fire insurance for your house. I wish I had known about hedging when I first started. I could have “insured” some of my losses I had with certain stocks that I just held and watched them fall week after week.
So for anyone thinking about share trading. All I can recommend to you is to do the research and educate yourself before you go off half cocked instead of buying shares first up. Invest in yourself and educate yourself. You can’t lose your education and you can take it where ever you go.!!
STEPS I HAVE LEARNT ALONG THE WAY
By considering these steps before you start you can make your first trading an exciting and safer experience.
1) Understanding Technical and Fundamental analysis.
This is where you learn how to make an informed decision on what company you should buy into, at the right price, and at the right time. There are literally hundreds of books, CD’s, DVD’s that have been written on both. This is where your education must start. It is essential you understand the basic language of share trading so you can talk the talk to yourself, your friends or your broker before you make a decision to buy a share.
Technical education helps you pick shares at a more accurate price and time, determined by certain technical trading techniques. Fundamental education can help you understand about the company you are considering investing in. Your Broker can certainly help with this information as they do assessments on companies all the time.
Most “Mum and Dad investors understand how you can make a profit in a rising market (Bullish), by buying low and selling high.
Did you know you can make money on a falling market (Bearish) by “short selling” shares. You borrow shares at a high price, sell them straight away and buy them back at a lower price and give them back to the broker you borrowed them from. Not so well known but just as successful in making profits if you get the trend right.
It’s not as daunting as you may think but some step by step education early will keep you on the right track.
2) Understanding Your Capital management and Risk Profile.
Are you trading for income or long term growth? If you have to live on some of the profits each month, your portfolio cannot compound its profits each month as quickly as if all profits were left in the account. This can lead to different risk management profiles depending on people’s circumstances and plans.
Capital and risk management is a paramount knowledge you need, so your initial investment in the stock market does not get blown up before realising you need to add more money into the account to survive.
3) What are your Financial Goals?
Unless you write down your goals on what this business is supposed to do for you, you will have no reference as to how it is performing for you. Is this business supposed to just supplement your other business, or wage income? Or have you higher goals set where it will replace your other income? What time do you think you can allocate to this business? Those decisions will determine whether you are a daily or weekly trader/ investor.
What time parameters have you set yourself, to see that it is succeeding and you are on track?
And finally, are your goals achievable? Understanding the realities of this type of business before you start trading, will help you realize the expected earnings that you can achieve given the capital you are starting with.
4) Trading Plan:
Once you have an understanding of your goals, and you have a basic understanding of trading using technical and fundamental information, you can begin to develop a trading plan that suits you. It needs to address your time and capital constraints, as well as address your risk profile.
Appropriate trading plans deal with technical trading techniques such as trend trading, break-out trading and reversal trading. As well as trade entries and exits strategies, position sizing and stop-loss management criteria.
5) Computers and Charting Software:
Most people nowadays understand how to run a laptop or a computer and they are getting more powerful and cheaper all the time. So has charting software become more powerful and cheaper.
There are very good charting packages these days. Once you have an understanding of basic chart reading (technical analysis), then you can start looking at the type of charting software you really need because you understand what you want first.
Many software packages have so many bells and whistles that you may never use. So be careful not to over pay for indicators you may not understand, ever use or need when a more basic cheaper version is available.
If you are not going to be in front of a screen all day since you have a day job as well. Don’t buy live data either. It’s a waste of money. When you are looking at the data feed for your charts, end of day data is a lot cheaper and is all you will need.
6) Online Trading Platforms:
There is a plethora of online platforms that you can consider. If you have already purchased a quality charting software package, then you don’t need to duplicate them with your online platform.
Consider the brokerage fees of each platform, and is there a minimum number of trades you can do each month, so you don’t pay for data fees on top of your charting data fees. That may be a consideration for you once you become a more active trader.
Also ask whether the online platform allows you to call a broker within the business to take a trade for you when you are not near your computer. You may need to place or change a stop for example. If they don’t offer this service it may cost you dearly one day.
Broadband is just about a must these days as the platforms are more sophisticated and dial up just can’t cut it for speed that traders want these days.
7) Full Service Brokers:
If you have a basic understanding of Fundamental and Technical analysis before you begin working with a Broker, you then have the mental advantage that you can communicate with him in the same terms that he is using.
It’s just not good enough to buy a share because it is a “good company”. What does that really mean, and does that help you pick a price to buy the share at? No. You need more information so you can make a more informed decision.
If you understand the language of fundamental and technical analysis, you will have a much better relationship with your broker.
You will be able to talk with him on a similar level, instead of feeling that they know best. Remember it is your money so keep a good understanding on where it is going at all times.
Not all Broking businesses are the same. You may also find that
within the one business there may be brokers that are more fundamentally driven than technical.
It is said that fundamentals help choose the share and technical analysis assists with the buying price.
So shop around and ask them questions on how they make decisions for their clients before you sign up with any one broker. You need to make a decision on whether you are investing/ trading on either technical or fundamental issues or both.
You will need to have a bit of knowledge of both for sure. Explain to your broker your objectives and your trading plan, so he has a better understanding where you want to go with your venture.
Because you are paying for full service ie advice on shares, you will pay more for brokerage each time you buy or sell compared to online trading. You get what you pay for, I think is the term.
Ask whether the business offers a daily or weekly news report, and daily recommendation. Ask them to show you their past performance over the past 3 - 12 months and 5 years.
Also brokerage fees can be quite varied between businesses and often you can negotiate lower fees dependent on volume and value of your monthly trades.
8) Record Keeping:
Like any other business, good financial records can help you stay on track to achieve the financial goals you have set yourself.
A separate bank account just for share money can help simplify accounting and reconciliation issues.
There are many record keeping software packages available, and when you first start you may only need a simple excel spreadsheet program. More complicated programs may just confuse you in the beginning. Ask your accountant for some advice. I am sure he will have other clients that trade shares and give you some options to look at.
9) CFD’s, Options, Warrants and Hedging:
These are instruments that can be used to make high percentage profits if you get in the trade correctly and have excellent trading strategies. If you are not making consistent profits in share trading yet, these instruments are not for you. They can blow up your portfolio very quickly.
Once you are consistent in shares, these instruments can be then studied in more detail. In different trading conditions these instruments can help insure (cover) your share value through volatile times.
Conclusion:
As I said in the beginning of this article, share trading can be an exciting and very prosperous venture, but like any other successful business, it is based on a good foundation of knowledge and strong discipline within your trading plan.
I hope these points can help anyone thinking of share trading to fast track their business with out going through the start - stop experiences many new traders can go through.
All businesses have setbacks at some time but if you have good checks and balances in the beginning, you are able to recognise changes in business trends and “trim the sails” of your business strategies to take advantage of the changing winds.
Happy Trading
Peter Benson
Think Financial Group Pty Ltd
www.thinkfinanciallearning.com.au
Disclaimer
Please note the following, Think Financial Group Pty Ltd, Shares Corporation Pty Ltd. and the author does not take into account the investment objectives, financial situation and particular needs of any particular person and before making an investment decision on the basis of the information contained in this publication, a prospective investor needs to consider, with or without the assistance of a Securities Advisor, whether the information is appropriate in light of the particular investment needs, objectives and financial circumstances of the prospective investor.
The information contained herein is not suitable to be acted upon as investment advice; and it is advisable to obtain investment advice before making any investment decisions relying on the information provided.
No part of this publication contains trading advice stated or implied. This publication is not an invitation to trade.
The directors and associates of Think Financial Group Pty Ltd and Shares Corporation Pty Ltd are not Securities Advisors or licensed trading or investment advisors.
Traders requiring trading or investment advice should contact a licensed advisor.
Stockbrokers are licensed Securities advisors.
Neither Think Financial Group Pty Ltd, Shares Corporation Pty. Ltd., nor anyone else involved in the production of this publication will be liable for any liability, loss or damage directly or indirectly caused, or believed to be caused, by using trading methods or any information contained in this publication.
Think Financial Group Pty Ltd and Shares Corporation Pty. Ltd. are organisations designed to assist traders and investors to become more knowledgeable and independent. The giving of advice is therefore contrary to the very objectives of the company.
Warning trading shares carries with it the risk of loss of capital. Before purchasing any securities or making any investment decisions contact a licensed securities dealer or broker for investment advice.
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