Thinking about trying your hand at share trading? Whether you’re interested in day trading or looking to invest over the long-term, it’s not exactly something you can jump into without a good amount of direction and planning.
To help you out, we spoke Alek Trpkoski, Vice President of Blackpearl Capital for his thoughts on what every beginner trader should be doing. For anyone without trading experience, the share market can seem mysterious, if not downright inaccessible. The following tips hope to get you off to the right start.
Know your investment types
So you’ve seen the films, read the success stories, and are excited to finally test the share trading waters yourself. It can be tempting to dive right in, but the team at Blackpearl Capital advises taking some time to familiarise yourself with the basics of share trading and the types of instruments you’ll be dealing with.
“Do not jump at the first thing you see. Rather read, observe, and learn. Learn the difference between a stock, a bond, an option, and all the various other products that are traded. You want to ensure your strategy is consistent with your goals and the results you are seeking are also consistent,” said Trpkoski.
Immerse yourself in the market
Active investing - as the name suggests - isn’t really something you can do from the sidelines. It’s hands-on and requires a great deal of commitment. If your long-term goal is to be able to manage a large and diverse portfolio - one that generates a steady stream of income - you’ll need to be able to devote yourself to regularly monitoring the market.
This might be a bit of a slog to begin with but with practice and study it should get easier over time, especially if you’re taking advantage of the vast amounts of resources online. The more educated you are, and the more attuned you are to market movements, the better you’ll be able to recognise good investing opportunities when they arise. Trpkoski puts it this way:
“What you want to do is be immersed in the market, the companies you have within your portfolio and the industries they are in. Keep it simple and do not opt for complicated investments that you don’t understand. While you might have heard of specific strategies where people have made money, you still need to understand the metrics behind these strategies.”
Do your research
Before buying shares in a company, you’ll need to do your research and make sure you understand both its business model and its potential for long-term growth. A common mistake beginners make is to invest in companies they know nothing about. This is misguided for a number of reasons, but one in particular: if you don’t understand what a company does, chances are you won’t understand how it makes its money.
Famed investor Warren Buffet recommends investing in companies that fall within your “circle of competence” — basically the subject area that you’re most knowledgeable about. Say you work in the software industry. Chances are you keep up with all the latest developments in the field and have a good idea of what makes for a strong company, at least more so than the average person. This can be used to your advantage when picking out stocks.
For those who are just starting out, Trpkoski recommends a conservative approach. For example, it’s generally a good idea to stick to large, established companies, ones whose continued success you're pretty confident about. The idea of taking a shot on that fledgling start-up in the hopes it will become the next billion dollar enterprise can be seductive, but what’s more likely to happen is it’ll flounder and you’ll wind up losing money.
Make sure to diversify
There’s no way to completely eliminate risk when trading, but it is possible to minimise it. Trpkoski advises spreading your investments across a range of asset classes and industries, a strategy known as diversification.
How does this work? Well, let’s take two scenarios. Say you have $25,000 you’re willing to invest. If you opt to buy $25,000 worth of stocks in just a single industry, you could find yourself in a pretty vulnerable position if that industry experiences any shocks or downturns.
If, on the other hand, you divvy up that $25,000 and allocate it to a variety of assets and industries, the entirety of your portfolio won’t be affected if one of them takes a hit. Essentially, diversifying acts as a buffer against significant loss, making it less likely all your investments will dip at once.
“Create a portfolio that will keep your risks at a minimum. It’s not just about growing the portfolio, but also minimizing your losses when the market is not doing as well. Rebalancing and reweighting of your portfolio are just a few actions that would be required from time to time,” said Trpkoski.
For more information about share trading, and a look at the various platforms available, be sure to check out our share trading comparison page.