Getting Started In Share Trading And Investing: How To Invest Part Four

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Forming A Trading and Investment Plan

So you’ve learnt what the stock market is and the two different ways to analyze a share. Now what? Well before you trade and invest in the stock market, you absolutely must have a trading or investment plan. Amazingly more than 80% of investors do not have a written trading plan before they trade or invest. In fact, as Jesse Livermore famously said, most investors will risk “half their fortune in the stock market with less reflection that they devote to the selection of a medium-priced automobile.”

But what do we put in our trading plan and how do we form one? Very simple. Our first point of call is to determine our rules for buying and selling. This involves finding an entry and exit rule that you can practice with and test over at least five years of data (and preferably ten or more). You must then have a method for determining if your plan is currently successful, which our flagship course will show you how to do.

Your trading plan will also show you how much to risk in the stock market at any one time and on any one share.

It Must Be Right For You – Finding The Right Timeframe

When you form your trading and investment rules you must take into consideration the time-frame you are using. It is no good having rules for day-trading when you are still working full time. Likewise, it is no good having long term investment rules if you would prefer to be a part of the action every day.

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You might prefer to look at stocks directly, or you might prefer to trust an automatic system you have coded yourself. Once you know your trading and investment personality, you can choose rules that will suit you.

Starting Small

Once you have your trading and investment rules and have tested them over five years of data or more, it will come time to put them to work in the real world. Most people will tell you to paper trade once you have tested your trading and investment rules. Paper trading means to write down your trades instead of putting any money into them at first. Instead of this, I prefer the method of risking very small amounts of money in your trades. Amounts like $20.00, $50.00 or $100.00 per trade. This will give you an idea of the psychology of trading as well, as there is now real money at risk.

Going For Gold

Once you have your rules, have tested them, and traded them with ridiculously small amounts of money and found them to be profitable, then you can increase your risk and risk the amount that is right for you in the stock market. During your trading you will have losing periods and drawdowns, but it is important to remember to risk the right amount and stick to your proven trading rules.

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December 21, 2011 Tags: ASX, how to invest, how to trade, stock market beginner Posted in: Articles On Building Wealth, ASX No Comments

Getting Started In Share Trading And Investing: How To Invest Part Three

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How To Analyse A Company Share

So now you know what a share is, what a market is, how to buy and sell shares and where to find company information. Now we have to learn how to analyse all the company information in order to determine if it is a good buy or not. When analysing a share, there are two things we absolutely must look for:

1: The company price trend

2: The company earnings and balance sheet

Of course there are other very important factors involved as well, such as the direction of the overall market (i.e. are we in a bull market or bear market?). The reason we’ve included both of these things when analysing a share is that many people start out trying to determine if the company they are buying is a solid one. After all, if it has good earnings and a solid balance sheet, it should go up right? Not always. And that is why we look at the price trend as well.

All too often a company with good fundamentals will be trending down, losing money for its investors. And just as often, a company with a terrible balance sheet might rocket to the moon, making thousands for its investors. This is why is is also prudent to check the trend of a market and company share before investing.

Two Schools Of Thought

This results in two schools of thought in the stock market: fundamental analysis and technical analysis. There have been many successful investors throughout history who have used both type of analysis, so there is no single right way to analyse a share. The key is to find the method that works for you. Here we look at the two methods and how they differ.

Fundamental Analysis:

Looking at a company’s earnings, debt, assets and liabilities is called fundamental analysis. Your stock broker will have this information for you to view, either online of via their broker reports.

The idea behind fundamental analysis that by buying companies with a strong balance sheet, solid earnings, and controllable debt, the share price is more likely to go up. Buying strong companies is good in theory, but fundamental analysts must be aware that even strong companies can go down in price when other factors are involved (like a bear market, for example), and often a company’s earnings results are made public long after other investors have sold the share causing it to fall.

Technical Analysis

Looking at a companys price history and volume is called technical analysis. The most common way to do this is with a price chart, which shows the history in price of a company or market. Often you can see years and decades of history for a stock in a price chart, which allows you to test your technical analysis theories to see if they work.

The idea in technical analysis is to identify patterns or tools that give you a high probability that the price will continue upwards. Examples of this would be price crossing above a trend line, or a moving average as a signal to buy. Practitioners of technical analsysis should be aware that nothing works 100% of the time: it merely gives you a higher probability of success.

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December 21, 2011 Tags: ASX, how to invest, how to trade, stock market beginner Posted in: Articles On Building Wealth, ASX No Comments

Getting Started In Share Trading And Investing: How To Invest Part Two

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What Are The Benefits Of Share Trading and Investing?

Buying and selling shares of a company is very easy to do once you are set up with your stock broker. Therefore, some of the benefits include:

The stock market is very “liquid” – there is almost always a buyer or seller at the other end of your order. This is very different from the property market for example, where it often takes around three months to sell a home and the price might be no where near what the real estate agent told you it would be.
Therefore, another benefit in the stock market is you can also see exactly what price your company share is worth at any time by looking it up online, at the ASX website (or your country’s exchange) or at your online broker.

Another major benefit of trading and investing in ASX Shares is the dividends and tax benefits.

Currently if you hold an Australian share for more than 12 months, you will only be taxed on 50% of the profit that you make when you sell. If you hold an Australian share for less than 12 months, all of the profit you make is added to your taxable income for the year and taxed at your current rate.

Also, because companies pay tax on their earnings already (usually at the company tax rate of 30%), when distributing a dividend they can sometimes give you a “franking credit” which is equal to the tax the company has already paid. For example, if you received a net dividend of $700.00, you could receive the other 30% (in this case, $300.00) as a franking credit to offset against your taxable income for the year. Of course, different companies can have different tax structures and levels of franking, so it is wise to consult an accountant regarding tax and your investments.

What Are The Risks?

The saying “no risk, no reward” has always been applicable to the stock market. The main risk for an investor is that the share price will not do what you want (i.e. if you buy a share, it might go down). As far as your money is concerned, this is the greatest risk.

Typically, if you lose money in the stock market, it it also harder to earn it back. For example if you lost 10% of your capital, you would now have to make 11% to be at break even again. A 30% loss would result in needing a 43% return just to break even, and a 50% loss means you would have to make a 100% return just to break even again.

If you put all your money into one company share, and that company share halves in price, you will have lost half your money. This is why it is wise to spread your risk over a range of companies. Typically, many investors do not invest more than 10% of their trading capital in any one company share.

Prudent investors also use a stop loss which further limits their risk. If the share price drops below a certain level, they will sell so they can live to invest another day.

How Much Can I Lose?

Although there is always the risk that you could lose all your money in the stock market at once, unless you do something silly like invest in only one company that goes down or borrow too much to invest this is not likely to happen.

But there is always the risk of loss in the stock market. Far more likely is this scenario:

Let’s say you invest in 10 companies, giving 10.00% of your portfolio to each. Now in each of those companies, you decide to set a stop loss which will get you out if things go wrong. That stop loss is set at 20.00% below your buy price. So how much can you lose? Well, 20.00% of 10.00% is 2.00%. This means you are risking approximately 2.00% of your entire portfolio on each trade.

Now let’s say that ALL of your companies went down and you got out at your stop loss. 10 trades, x 2.00%, = 20.00%. So you could lose 20.00% of your portfolio in this worst case scenario.

Now obviously this will vary in real life, depending on how much you risk, and how educated you are in how to choose stocks and when.

How Much Can I Make?

As the saying goes: no risk no reward. By risking money in the stock market we are aiming to make a positive return and therefore make money. But how much we make depends on:

How much we risk (i.e. the more capital we put in, the more we may be able to take out)
How skilled we are at choosing stocks and reading the market
How much leverage or borrowed money we use (if any)

For example, if we take our previous scenario but change it so that they ALL go up, we could make a 20.00% return on our portfolio.

Or if we are more advanced, we might be using leverage or borrowed money as well. In this case instead of 10 trades we might have 20 trades at 2.00% each, giving us a 40.00% return instead.

Or again if we are more advanced, we might be profiting a lot more than we lose in each trade. This can have the power to increase our returns beyond 40.00% under the right conditions.

How Can I Make More?

As a general rule the more you risk and the more trades you make, the more potential you have for greater gains. For example if you risk that same 2.00% from our earlier scenario but only trade 3 times a year, it is unlikely you will make an amazing return. Although, it is also unlikely you will lose a great deal either.

But if we were risking 4.00% per trade and making 50 trades a year, the potential reward (and risk) is much higher. It is always wise to be managing your risks first, and managing your profits second.

Get More Education: If you want to learn solid ways to discover and manage your stock market risk and improve your stock choosing abilities, our stock market plans, courses and tools are a brilliant place to start.

How Can I Lose Less?

As discussed in the previous example, risking less per trade and making less trades are two ways to lose less in the stock market. Another way is to get educated in choosing company stocks, identifying stock market trends (both up and down) and learning how to trade with a risk level that is right for you.

Discover More: The stock market plans, courses and tools on this site are a great way to learn how to manage your risk, identify up and down trends and choose stocks.

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December 21, 2011 Tags: ASX, asx shares, how to invest, how to trade, stock market beginner Posted in: Articles On Building Wealth, ASX No Comments

Getting Started In Share Trading And Investing: How To Invest Part One

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What Is A Stock?

When a company needs to raise money to expand their business it can do it one of two ways. Firstly, they could borrow the money. Or secondly, they could raise the money from investors by selling them a small portion of the company.

That is where company shares or stocks come in: the stock is a portion of the company that you buy. Consider that when you buy a stock, you are also buying the company’s potential for future earnings.

Therefore, a company share or stock is a part ownership of that company.

What Is The Stock Market?

The stock market is where the buying and selling of company shares takes place. Just like any other type of market, this one brings buyers and sellers together to make an exchange. In Australia, these transactions take place through the Australian Stock Exchange, or ASX.

In the United States the transactions take place through entities like the New York Stock Exchange (NYSE) or NASDAQ (National Association of Securities Dealers Automated Quotations), or in Europe the London Stock Exchange (LSE).

In Australia trading is done via a computer system, where share transactions are processed in the same order as they are made and the system automatically links buyers and sellers together. This is a far cry from the stock exchanges of the past (and that often feature in movies), where orders were shouted across the exchange floor and prices were chalked up on a board.

How Do I Buy And Sell Stocks?

Buying and selling stocks is done through a stock broker. A stock broker has direct access to the market for trading shares, and therefore acts as an agent to buy and sell shares for you, for which a fee is charged.

Types of Stock brokers range from online stock brokers like Comsec, E*Trade or Macquarie Prime, through to full service stock brokers you can find in your capital city. A full service stock broker is often licensed to give you advice on your stock portfolio along with buy and sell recommendations, where an online broker will have more raw company information for you to do it yourself.

What Does It Cost To Buy And Sell Stocks?

The cost to buy and sell stocks with a stock broker is known as “brokerage”. The brokerage when using an online stock broker can range from $10.00 to around $30.00 per trade (i.e. to buy or to sell your shares). When using a full service stock broker the cost often ranges from $50.00 to $90.00 per trade.

When you buy and sell stocks, you will be buying or selling at the current market price. Your broker or online broker will have this information, as will many sites online (see below).

What Is A Dividend?

A dividend is a sum of money paid regularly (often twice a year) by a company to its shareholders out of its profits or reserves. Some people invest solely for their dividends, and a good dividend is typically one that is more than the current reserve bank Cash Rate. For instance, if the cash rate is 4.25% p.a., then a good dividend might be 5.00% of the share price or above. Dividends typically range from 1.00% to 10.00% of a share price, although they can sometimes be higher.

Where Do I Find Company Stock Information?

You can find information on company shares at many places. Firstly, your stock broker should have information he or she can give you. An online stock broker like Comsec or E*Trade will also have company information like earnings and dividends.

Further to this, your local stock exchanges page should have some share information also. For example the ASX (Australian Stock Exchange) home page has company dividend dates and current company announcements.

Both Google and Yahoo finance sites also have free information on company shares.

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December 21, 2011 Tags: ASX, asx share, asx share trading, beginner stock market, how to invest, how to trade, learn to invest Posted in: Articles On Building Wealth, ASX No Comments

Help! I Know NOTHING About Stock Market Investing!

Contents | Part 1 | Part 2 | Part 3 | Part 4

Getting started in trading or investing can sometimes be a daunting task. There is often a lot of conflicting information out there on what to do and how to get started. This place is a great one to start with for an unbiased view on the different terms, tools and knowledge required if you’re just starting out. And when you’re ready to move on, you can do our free intermediate stock market video course.

Below you will find the contents of a guide designed from the very basics through to learning what it takes to make money in the stock market, giving you a range of information that you are looking for. And of course if it’s not here or you have a further question, just ask.

Contents:

Part One (click here)