The stock market is a huge market place for buying and selling shares which can assist your quest for Financial Freedom by enabling you to create wealth through capital growth and dividend income. When you buy a share you are buying a share of a company and participate in its growth and share in the profits. The stock market, on average, has provided good returns over a very long period for investors.
You can get started with relatively small amounts using an online broker.
Start LearningThere are many different strategies investors use when investing in the stock market and we will cover a few of these below.
Buy & Hold
This is where a share is bought and held for a long time. The expectation is the company will grow over time therefore the price of the shares will also increase as the company grows. An investor would actively select a stock and once the stock is bought the investor would not be concerned about fluctuations in the market price.
Buy a Managed Fund
This is where an investor would buy a share in a portfolio which is managed on their behalf. This strategy outsources the management so you are effectively relying on someone else to make the decisions of what to invest in. A management fee will be charged for this convenience and expertise.
An alternate approach would be to buy shares in a listed investment company (LIC). These companies are listed on the stock exchange and you can buy shares in them as any other listed company. They primarily invest in other listed companies, the makeup of their portfolio will depend on the LIC’s strategy. LIC’s usually have quite low management fees and their shares can be easily sold if you want to liquidate your holding.
Day Trade
Day trading is exactly what it describes, buying and selling shares within the same day. This type of trading is really speculating rather than investing. A day trader will take a position based on momentum or a charting pattern and will sell out of that position prior to the end of trade. Usually day traders have written trading rules which they adhere to so as to reduce the risks of trading based on emotions.
Buy the Trend
This is where a particular share has been identified as being in an upward trend. The investor would buy the stock and monitor it on a regular basis (usually daily) and sell when the trend line is breached to the downside. This strategy can be extremely helpful in achieving Financial Freedom if executed successfully.
Identification of such stocks is usually based on fundamental or technical analysis.
Fundamental analysis looks at financial reports and economic factors which may influence the companies’ profitability in the future. So the focus is on the cash flow statement, balance sheet and the profit and loss statement to determine the intrinsic (real) value of the company. You would buy shares when a company on the stock market is trading at less than its real value and sell when the stock trades above its real value. This strategy is usually waited to the longer term and requires a good understanding of how to read and interpret financial statements.
Technical analysis looks at charts to forecast future price movements based on analysing past movements of the stock and common charting signal points. The chartist would analyse various charts such as candle stick, moving average price, volume, trend lines and channels. The chartist is looking for signal points such as price resistance levels, price breakout points, changes in volumes traded relating to price, changes in a price trends.
Anyone of these or a combination may be the signal to buy or sell the share being charted. Typically a chartist would take a position based on a buy signal and hold the stock until a sell signal was detected. As with the day trader, the chartist has written rules which they adhere to as to reduce the risks of decision making based on emotions.
Share Trading Tips
Successful share trading requires the ability to overcome your weaknesses as a human. To do this you will need to identify what your weaknesses are and how to manage them.
Some of the weaknesses you will need to be aware of are-:
a) Over Confidence
As investors we believe that we’re better able to spot the next hot stock than another investor is, we think we are superior but we’re most likely not. This results in riskier trades being made with little or no risk analysis undertaken.
b) Selective Memory
Instead of remembering the past accurately, in fact, you remember it selectively so that it suits your needs and preserves your self-image. Remembering only your successful trades and ignoring those calls that missed a trend or which lost money can contribute to over confidence.
c) Loss Aversion
This is the inability to accept the stock you picked was a bad decision. You will be more willing to sell a winning stock than admit a mistake and sell a losing stock and take a loss. Your unwillingness to take the pain early and ride the stock to the bottom in the hope it will come back to break even can result in a substantial loss.
Another factor is Sunken Cost theory, which is, you can’t ignore the costs already sunken into a decision. Eg You have bought some cheap airline tickets just because they were on sale, even though you know the accommodation, car hire and other costs will be thousands you will still use the tickets rather than let them laspe because of the sunken cost of the tickets. Don’t be afraid to admit you have made a mistake and take a loss.
Managing these weaknesses can only be achieved through a written trading plan which details your goals and objectives, entry and exit points, risk management and money management. A properly developed trading plan should mean that every detail of the trade has been planned in advance. This takes out any emotional trading which is not good for your wellbeing as it can be extremely stressful and unprofitable.
Take Care
A note of caution as all the above have risks and can result in capital losses as well as capital gains. Once again I stress the importance of your streetwise financial education to achieve Financial Freedom in trading the Stock Market. The information above is only the first step in your education to open your mind to new opportunities.