Share trading 101
So you've bought your power suit, cigar and $400 haircut, and all that's left to do is make an e-trade killing.
Well, we're sorry to say the Mozo guide to online investing doesn't have the failsafe secrets to overnight millions. But it can help you negotiate the tricks and stings of share trading, with a few top tips for getting the best brokerage deals.
Because the $100-plus you could save on the way to your hotshot fortune will come in handy for lighting that cigar.
The basics of trading
Although money never sleeps, the ASX does rest, and is open 10am to 4pm weekdays.
A marketable parcel
You can buy or sell upwards of $500 worth of shares (known as a marketable parcel) from over 2000 companies (worth over $1 trillion).
Options, warrants, CFDs, and more
While shares are the simplest way to invest in a company, a host of fancy financial creatures promise untold profits.
Top trading tip: If you're going it alone (rather than relying on professional advice), it's a good idea to go for investments you understand.
Unless you're terribly well connected for someone reading the 'basics of share trading' page, you'll need a broker to carry out your brilliant stock market decisions. These usually come in two varieties.
- Full service brokerages. The strong suit of the traditional variety of broker is service, including clever advice, wide-ranging research, and perhaps a little flattery.
- Online brokers. Online share trading platforms are all about low transaction fees, but they also offer increasingly sophisticated research and sharemarket tools.
So which broker do you go for? It depends on what kind of trader you are...
The different types of trader
The first thing to do (after you've practised yelling "sell, sell" into your mobile in crowded areas) is figure out whether you're a casual or active trader.
If you're looking at making 1 or 2 trades a month, you'll find yourself in the 'casual trader' category. Since you won't clock up too much in brokerage fees, you'll want to keep any ongoing monthly fees to a minimum.
Head, casually, over to the low-monthly fees share trading platforms for casual traders
If you’re trading fairly frequently, but not so much you consider yourself a pro, you fall in the regular trader category. Like casual traders, low brokerage costs are probably high up on your priority list, but you’ll also want in-depth market research to complement them.
If you're making 1 or 2 trades a week - or a day - you're an active trader. You'll want low - or superlow - brokerage fees, and you might also get monthly fees waived on the basis of your feverish trading. Active trader accounts also often contain access to market data, independent research reports and live data feeds and market watchlists.
Scan the market for low brokerage fees in highly active minutes and compare active trader accounts
If you're looking to play the market, you'll want to read up a little. Many online share trading platforms offer a range of tools, charting, live market data and in-depth research, at a much more reasonable cost than losing your money on a blind bet.
Long-term traders looking for blue-chip investments with companies they recognise won't need the research and data of a gambler. Most brokerages offer enough information for you to track these top performers, come in at a decent price, then sit back and watch your pile grow.
The other consideration is, of course, the amount you're typically trading. You might be more willing to have a bit of a punt with $500, where you'd prefer some serious, full-service advice before plunking down ten grand.
A $10,000 trade might cost $30 or so with an e-trader, and $150-plus through a full-service broker.
Top trading tip: A 2% drop in share-price will almost always outweigh full-service brokerage fees on a $10,000 trade, so you do need to factor in the value of good advice.
Another top trading tip: Full-service brokerages still take their fees even when their advice is bad. So you'll definitely want to do some research about your broker's record.
Or, if you've already banked your fat cat profits but are shaking in your crocodile-skin boots about the taxman, read on...
There are a range of benefits enjoyed by professional share traders. These include:
- claiming trading losses as tax deductions
- claiming deductions for buying and selling costs
- claiming prize booths in swanky bars
Top trading tip: All the online share trading and pinstripes in the world don't necessarily make you 'a trader' (so far as the taxman is concerned). Technically, it's "someone who carries out business activities for the purpose of earning income from buying and selling shares".
Another top trading tip: If you're serious about share trading as a career, rather than as an excuse to wear shoulder pads, you'll need to show a fairly serious volume and frequency of trades, as well as professional record-keeping.
The rest of us
Sadly, ordinary souls can't claim trading losses or brokerage costs against other income. However, they do have to include dividends and capital gains as part of their income. (We know. Take it up with your local member.)
Top trading tip: You can offset capital losses against capital gains, including gains in future years.
Needless to say, share trading comes with its fair share of risks. Trading requires a great deal of commitment and discipline, and if you don’t do your research you could easily be throwing your money away.
There’s always the possibility you could lose your money, and perhaps wind up owing more. And if a company you’ve invested in goes under, you’ll be the last to be paid out. For that reason, it’s important that you only trade with funds you can afford to lose.
Top trading tip: Contrary to what some might claim, losses are pretty much a given when it comes to share trading. The trick is to make sure your total wins outweigh your total losses.
Acting on bad advice could land you in the red, so if you’re taking tips from someone, you need to make sure it’s all backed up by solid research and not just a shot in the dark.
Share prices can rise and fall fairly rapidly, sometimes in the space of a day. That means you’ll have to make a call between sticking with it and riding out the ups and downs, or buying and selling at the right time - which requires a lot of time, effort and know-how.
For first-timers, wading into the share trading waters can induce a great deal of stress. If you’re the type of person that agonises over missed opportunities, or loses sleep analysing the day’s decisions, you might want to first test the waters with the share trading simulator available on the ASX website.
Share trading can often seem inaccessible to beginners, and a big part of that is the sheer amount of jargon that’s out there. Below, we’ve compiled some of the terms you’re likely to encounter and what they mean.
Bear market: This is used to describe the stock market when prices are falling and the outlook is pretty grim.
Blue chip stock: The gem of your portfolio. Named after the highest value chips at a casino, blue chip stocks are the stocks behind large companies that have been operating for many years and have a market valuation in the billions.
Broker: An individual or firm that executes orders on behalf of traders in exchange for a fee.
Bull market: This is used to describe the stock market when prices are going up, investor confidence is high, and the outlook is generally very positive. No one can really predict when a bull market will come along, but when it hits it usually lasts for months or even years.
Dividend: the portion of a company’s earnings that is paid out to shareholders, as a reward for investing in the company.
Liquidity: Used to describe the ability to trade a stock without substantially affecting its price.
Margin stock trading: This involves borrowing money from a broker (usually at a very low interest rate) to purchase more stock than you’d be able to without the help of the loan. If prices go the way you intended, you could see yourself making a nice profit. But if prices go south, the resulting debt could be devastating.
Short selling: This involves borrowing stock that you believe will drop in value, selling it, and then buying it back at a reduced price some time in the future. You then return those stocks and pocket the difference.
Yield: The percentage of a stock paid back in the form of dividends.