How to avoid the pitfalls to make share trading work for you
W ith the number of fly-bynight trading platforms — with their promises of overnight riches — on the rise, it’s important that you are cautious if you intend to trade stocks and shares.
This means familiarising yourself with the language of the stock market, the psychology of trading and how to manage risk.
There are basic elements of trading you’ll need to wrap your head around before you put your money to work.
Most people’s introduction to trading is through dealing in shares. When you buy a stake in a publicly listed company, you buy shares in — or part of — that company.
Listed companies are those whose shares are available on a regulated stock exchange.
For South Africans, that means the JSE. Although the JSE is responsible for listing companies and distributing shares between sellers and buyers, would-be investors can’t go directly to the owner of certain stocks with an offer to purchase: various financial institutions and individuals, known as brokers, act as intermediaries.
Brokers must be registered with the JSE before they can buy and sell shares on behalf of institutional investors and individual shareholders.
Investors buy shares to hold for a long period, while traders aim to make a profit off the short-term changes in the prices of those shares. This means traders watch share-price movements closely.
Traders can take a long position, where they bet that the price of the share will go up (when it appreciates). Or they can take a short position — when they make a profit from the decline of a share price.
Long and short positions can be taken over an hour, a day, a week or months, depending on the trading system you’re using and the position it caters for.
You may be tempted to put this off, but having a trading plan in place is important. Why? Well, it’s easy to get swept up by the market commentary, where hot stocks are continually punted. Stock picks are a dime a dozen — but few people foresaw the demise of African Bank, for example.
Your trading plan needs to take your trading strategy into consideration. Are you trading based on short-, medium- or longterm trends? Will you be looking at taking advantage of a particular stock’s volatility?
This is important. Trading is a time game. It’s an attention game. It’s an in-and-out game. You need to be alert and agile. You also need to put hours into your education.
If you’re going to rely on charts to help you decide which way a stock will head before taking up your position, you must first educate yourself. Sites such as MetaStock.com and Investing.com have great charting solutions and chart-reading resources for traders.
You need to familiarise yourself with the behaviour of markets and stocks. What causes markets to move? What impact does a weak currency have on certain stocks? What about the impact it has on gold or oil?
If you’re going to trade forex, you need to know how currencies interact with each other and how best to hedge so that you don’t lose money.
Most importantly, you need to learn and understand the trading platform you’re using. Do you know how to use the stop-loss function? How do you cancel trades? How do you get funds into and out of your account, and how long do you have to wait for funds to move from your trading account to your bank account?
Over the next few weeks we’ll be examining trading, to help you better understand the environment and your options. Next week: choosing the right platform and how to manage trading fees.