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Getting Started in the Sharemarket

One of the difficult questions I get asked in social situations and on Internet forums is: I’m interested in getting into the Sharemarket, where do I start? I immediately think to myself, “Good grief, where do I start with the answer without overwhelming this poor person with information!” 

When getting started in the sharemarket, there are a hell of a lot of things to think about, and a number of questions you need to ask yourself first. This can be quite a task, but it is worth going through to get a grip on how you will go about your sharemarket enterprise without losing some, or all, of your capital. 

Many people jump into the sharemarket without adequate preparation, lose a bundle of money, and conclude that the sharemarket is nothing more than a hyped up casino, where luck has more to do with success than skill. The casino parallel is one that is often used; indeed many people enter the market with a gambling mentality. These people I’m afraid will supply the profits for those who have learned the rules of the game. This is a topic all of it’s own and I’ll deal with casino mentality in another article. 

Now, back to those questions you should ask yourself: What are my goals, do I want to build wealth, make an income to replace my job, or both? Do I want to be an investor, or a trader? Technical Analysis or Fundamental Analysis? Is my view long term or short term? How much time am I willing to devote to analysis? How much capital do I have to start with? What type of broker will I use? What is my risk profile….heck, what are the risks after all? What is my psychological makeup/personality? What tools/information do I need? Where will I learn all this stuff? Am I nuts? My brain is exploding! 

These are questions, many of which the answer will be dependant on the answer to other questions. Confused? OK I don’t blame you but lets work through these one at a time.

What are my Goals

This is the first question you need to ask. Too many people enter the market with the fuzzy notion of “making money”, without due consideration as to what the money is for. Once we do that, then we can make some goals as to how much we would like to make and how we go about doing it. We are not at that stage yet though. 

Broadly, there are two ends of the spectrum here. At one end we are doing nothing more than trying to build wealth by leaving all of our profits in the account and letting our capital compound until ultimately some longer-term goal is reached, such as retirement. On the other end of the spectrum is the person participating in the sharemarket purely for income to replace income that ordinarily would come from a job or other business. This could be a lifestyle choice or it can be through necessity. 

Then there are points between the two extremes. In my own case, I am a full time professional trader. The profit I make pays for groceries, telephone bill, mortgage etc. It is my only income and as such dictates the way I trade. (More about that later) But I also want to retire one day so I want to let a certain amount of profit compound for investment purposes. So I fall somewhere in between. 

How much you will make depends upon many factors, which we will discuss below. Just a word of caution for the new participant; Many people come into the market with unrealistic expectations. I read an account of someone who started with $33,000 and tuned that into $7million 15 months later! This is not the normal experience; it is the exception rather than the rule. As a matter of fact that is absolutely extraordinary and only possible in a bubble market such as the recent tech boom using masses of leverage. 

One thing I should mention; that was that traders second start in the market. The first time he had a go at the market, he didn't learn the rules first and got well and truly worked over. Relying solely on brokers recommendation he managed to turn his $150,000 nest egg, into $33,000. OUCH!

Investor or Trader?

Ok moving on from the above question, we need to decide whether we want to become an investor or a trader. There is a difference so we need to define both so we can decide where we fit in. 

An investor will generally take a very long term view. He/she will research their purchases thoroughly, and satisfied at the long term prospects of the company involved, will purchase shares perhaps never to sell them unless there is a reversal in the companies prospects. It will be much the same as traditional real estate investment. Buy and Hold is another term used for investing long term in shares. 

A trader on the other hand, will buy shares with the express purpose of selling them at a profit again at some point in the future, depending on the individuals time frame, method, psychology etc. This could be a matter of minutes, days, weeks, to over 12 months. A trader will view the share merely as stock in trade, the same as a supermarket views corn flakes, tomatoes and chocolate bars. Some traders don’t even know what the companies business is and don’t care.

Technical Analysis or Fundamental Analysis?

Huh? I don’t want to have to get an MBA just to get into the share market, I hear you say! Well it’s not as fancy as it sounds. (Although some people like to complicate things well beyond usefulness) It’s simply different methods of examining shares. 

Ok, some definitions:

Fundamental Analysis, or F/A for short, is a method of analysing share prices which starts by studying aspects of basic company data such as sales, earnings, growth of individual products, new product lines, competition from other market participants. 

Technical Analysis, or T/A for short, is the study of price movements primarily through the use of charts. 

Your psychology, personality, timeframe, whether you are an investor or a trader and a host of other factors will determine which is best for you. Many people use a combination of both. 

Generally, if you are a long term investor, F/A will be your predominant analysis. If you are a very short term trader, then T/A will be more suitable. That’s a generalization so no jumping down my throat OK! 

I personally like using technical analysis for my Sharetrading. I find ploughing through company reports and fundamental data boring to the point of distraction. With all the creative accounting scandals of late one would wonder if the numbers they are showing you have any validity at all anyway. On the other hand the visual representation of price movements on a chart makes sense to me and I never tire of looking through them. Ultimately it is up to you.

Is my view long term or short term?

This question is really part of the above questions and should be considered in conjunction with them.

If you want to be an investor of course your view is long term, but if you want to become a trader then this becomes a very important question and will depend on your personality, psychology, capital available, time available and skill.

Their are traders with every conceivable time frame out there. Daytraders never hold positions overnight and may buy and sell the same instrument several times a day. Fast and furious stuff and not recommended for the beginner! Very few succeed at daytrading but the few that do, do exceptionally well. This does not include your humble author!

Next are swing traders. This is where I fit in. These traders will hold for a few days only, trying to capture moves as they oscillate up and down. 

Then comes the trend traders. These people attempt to capture trends of various lengths of time. Some trends can last several years if given enough wiggle room. Cochlear being one notable example.

There are other variations of the above but you will fit somewhere in the above categories. An interesting point is that many traders end up trading a different time frame than what they initially started out with. That's OK, it's a process. You will find your feet as you go along. 

How much time am I willing to devote to analysis?

One of the silliest things that I hear is when someone wants to make a living trading and only wants to put an hour a day into it. Mind you this can be done with two prerequisites; enough capital and enough experience.

In the beginning, at least expect to devote several hours a day to analysis and just reading and learning.

I spend all day at the screen, but that's because I enjoy it tremendously and I am looking for entry points intraday.  I also devote time to projects such as this website. Obviously if you have a job or business you want to continue with and your trading is for wealth building, then of course you can't, nor do you need to spend so much time at the screen. In this case an hour or two per day, or maybe even an hour or two per week will suffice. Again this depends on your method of analysis and timeframe.

How much capital do I need to start with?

To a certain extent this one is easy. For investors and wealth builders, any reasonable amount is a start. A few thousand is Ok. But be aware you won't end up a millionaire next year. :-) But any amount is a good start if you do this right. One point; if you have a small amount of capital, I don't recommend that you trade short term. Brokerage can gobble up your capital. But we'll talk more about that in other articles.

If you want to trade for a living, the amount of capital you have is very important. In a nutshell, the more the better and at least 200-250k. Many traders trade with less than this using leverage, but I would strongly suggest that you have this amount in reserve anyway, otherwise you are taking on levels of risk that are too high for your capital base. 

There is one thing I would like stress at this point. Trading for a living is not an easy task. One should well and truly make sure that they are capable of trading profitably, and have the appropriate psychological make up, before considering quitting your job.

What type of broker will I use?

There are three categories of broker:

1/ Full service broker

2/ Discount or execution only 

3/ Internet

To me this question comes right down to price!!!! I place no value whatsoever on broker recommendations (But hey, that's just me.) I can't emphasize this one point enough: It is your money, take responsibility for it yourself. You do the analysis, whatever method you prefer.  You make the decisions. If you don't know enough, educate yourself, PLEASE.

Brokers are brokers, they are not traders! If they were traders they would not be brokers. Brokers make their money by your turnover. I use an Internet broker for two reasons. One, I do not want ANYBODY in my ear when I make a decision to buy or sell who may screw up my thinking. The second reason is cost; My Internet brokerage cost is 0.11%!! Traditional brokers charge anywhere from 1% - 2.5%.

Easy decision for me.

What is my risk profile….heck, what are the risks after all?

If you put $10,000 (or any other amount) into the sharemarket and lost the lot, what would that mean to you? Would it be a devastating financial calamity? Would you not bat an eyelid? Your reaction between these two extremes will tell you your risk profile.

OK, lets talk briefly about risk. This is a very serious topic and you should devote some time to calculating, and reducing risk. If you do this the wrong way, you can lose your entire capital....plus some. Do it right, and you can reduce your risk to very low levels whilst still having enormous profit potential.

Please keep this phrase in mind and burn it indelibly into your psyche; "Risk/Reward Ratio". Once again, a topic for yet another article, but please remember that one.

What is my psychological makeup/personality?

Successful players will need certain attributes to survive. Discipline, dedication and control over emotions among others. We all have psychological Achilles' Heels and the sharemarket will certainly expose them. It's how well you recognize them and deal with them that will determine your success. 

Your personality can have a big impact on how you trade and what time frame you operate in. Myself as an example, I like to be busy and I'm impatient. That's why swing trading suits me. Trend trading drives me nuts with boredom so I tend to fiddle with the system trying to improve what can't be improved, to the detriment of profitability. Swing trading keeps me too busy to fiddle, so I am most profitable at that time frame.

We know each other quite well by now don't we? Then permit me to be blunt. Some people should not be involved with the sharemarket and I hope that if you are one of these people that I can talk you out of being a part of it. Perhaps the worst personality type for the sharemarket is the perfectionist who refuses to be wrong. These people will not sell a loser because they know they are right, the stock WILL go up eventually......fatal!!!! Remember HIH, Onetel?

What tools/information do I need?

The fundamental investor will need a source of quality information in order to make decisions. The newspaper is not good enough. This is not my area of expertise so it's up to you where you get your info from.

The technical trader WILL need charting software and a source of data. This can cost anywhere from free, to thousands of dollars for software and hundreds per year in data costs. The charting program I use is "Metastock" which costs around $1000 and my data costs around $350 per year, (I have no financial interest in any product I mention) which I am extremely happy with.

Where will I learn all this stuff?

Well, if you are interested in technical analysis, and are patient enough, you can learn most of what you need to know from this website as I get it up. Otherwise READ READ READ. Go to Borders or another large bookstore and buy some books. 

Alternatively, you may learn by subscribing to an Internet course, but please be very selective, some are excellent whereas others are not so good. Do some research before subscribing

Am I nuts? My brain is exploding! 

Well you just may be nuts, I don't know. Most people thought I was nuts. What is quite silly though is leaping into the sharemarket without giving due consideration to the above points.

If you think your brain is exploding.....relax, settle down, take some time to absorb it all because we haven't even started talking about techniques, traders psychology, money management and fun stuff like that yet. That is where the rubber meets the road.

Cheers

Wayne Lawrence

P.S. If this article was of benefit to you please email and tell me. If you found it was a bunch of hogwash, please tell me that too. wayne@tradingforaliving.info