Tips For The New Investor
Low-cost share platforms have shaken up traditional stock-broking and have turned many Kiwis into hobby investors. Chris Smith of CMC Markets has some tips to turn amateurs into pros.
19 October 2021
The shock of Covid-19 and lockdowns across the world were met earlier this year with waves of panic, and share prices dropped. Then share prices picked up worldwide.
We call this rollercoaster in prices ‘volatility’ and volatility always creates great opportunities for savvy investors to buy low and sell high.
One big effect was that it prompted a mass wave of new traders globally, including here in New Zealand.
What suddenly made it easy was the rise of applications which make it possible to access the share market from as little as $1 entry.
120,000 signed up
Figures from the Financial Markets Authority estimate as many as 120,000 Kiwis have signed up to online investing platforms like Sharesies, Hatch, InvestNow, and Stake since the first Covid-19 lockdown began.
And other factors are at work, too.
Younger investors are finding themselves largely priced out of the property market and have spare cash, and those with money to invest are finding that low cash deposit rates at the bank are leaving them no return after inflation and tax.
This is real turnaround after decades of trying to raise awareness and grow the investor community, especially after the 1987 share market crash left in its wake bitter lessons that were passed down through generations.
Covid-19 and new technology have played a pivotal role in accelerating this pattern, says FMA chief executive Rob Everett.
How it progresses from here, he says, will depend on new investors transitioning from simply ‘having some fun’ to seeing investing as a long-term commitment.
We’ve seen lower commissions also driving interest in investing.
Traditionally, share broking has been expensive for the low-value buying of shares, but the rise of zero-commission platforms and investment trading apps like Robinhood in the US have changed the landscape – and seen a massive uptake both in New Zealand and overseas.
Brokers can generate income elsewhere to reduce commissions by selling on order flows, foreign exchange margins and cash deposits.
This cost-to-benefit reduction for investors is a real gamechanger. Add to that stronger education online and a focus on customer experience, and these platforms have shaken up traditional stock-broking.
In the future, broking fees will come under the spotlight in the same way that KiwiSaver fees have in recent years, for competition and fairness.
If you’re a new trader and you want to make the step from “just a bit of fun” to something more serious and long-term, here are some tips from my 20 years in the market.
You can usually apply these rules to other types of investment, including property, because these investments all need dedication, and without risk there’s little return.
1. Manage your risk
The ultimate golden rule is knowing your risk profile. Invest with funds you can afford to lose.
All investors and traders aim to become profitable or protect their capital so, as a general rule, as long as you gain more than you lose on positions, you’ll be a successful trader at the end of each year.
Before you make a trade or investment, do your homework, and calculate your risk-and-reward ratio. Having a manageable portfolio can set you up for success or for failure. Only you can work out this ratio, which differs for everyone.
2. Don’t overtrade
Calculate the size of your position, or risk per share you’re willing to invest, consistently across each stock in your portfolio to help manage risk and avoid larger drawdowns in your account balance.
3. Be patient
It can take years or even a lifetime to perfect trading and investing.
Even when you think you’ve mastered the art, you’re never truly finished learning.
Legendary investor Peter Lynch once said: “In the stock market, the most important organ is the stomach. It’s not the brain.”
Having a strong stomach through crises and acting with a plan and not from fear is easy to say but hard to do. Consider the Covid-19 sell-off period as an example of this.
4. Buy high, not low
It may go against conventional thinking, but I believe that buying shares at 52-week highs can be more profitable than buying at 52-week lows.
When you buy cheap stocks, there’s a risk you’re buying losing stocks that are cheap for a reason. Buying high-value stocks will mean you have a greater chance that they’ll keep moving up.
5. Apply technical analysis
If you want to make better investments, it’s important you know how to evaluate price action based on historical price data.
Fundamental analysis tells investors what to focus on, things like sales and earnings. But technical analysis is a visual tool showing what others have done in the past and what they may do going forward, such as bases, support, and resistance.
Remember, it’s just a guide to increase confidence in your decisions, not a guaranteed predictor.
6. Sell, sell, sell
When it comes to managing risk, selling is more important than buying.
If exit plans are not your strong suit, place a stop-loss order – which, when a pre-determined price is reached, will exit your trade.
7. Avoid averaging down
Rather than hoping a company can turn things around, instead add shares in stocks that have momentum and have quality, consistent earnings reports.
Trends last longer than most people expect. Averaging into a position is smarter than a full allocation in one go, because picking the right time for entry is never easy.
8. Accept losses
Trading losses are simply a part of investing and doing business. As long as they’re factored into your strategy and process, they’re not necessarily a sign of failure.
Everyone makes mistakes and how you deal with your losses is the key to long-term success. Unless you choose to buy low-risk, low-return products, losses are usually unavoidable.
9. Don’t listen to the ‘noise’
Your strategy may be influenced by trading predictions on stock blogs, newspapers, and other media, but it’s best to ignore any speculation.
You’re likely to get better results by doing your own research, but when you’re new to the markets, using financial Twitter and YouTube channels can be helpful… but be very careful and wary of what you hear and look for trusted proven sources.
10. Trade without emotion
Your worst enemy is emotional trading. Build a strong strategy that you’ll stick to.
The more you step back and look at longer-term trends and realise that normal market behaviours fluctuate, the better.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person. The author does own shares in some of the securities mentioned.
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Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.