David asks: I am interested in investing on the Johannesburg Stock Exchange but I don’t want long-term investments. I want to know about trading and how to go about it. I am willing to take the risk for I believe that if you don’t takes risks you will have no success.
Maya replies: There is a saying that goes “high risk, high return”. The idea is that the more risk you take the more return you should be paid for that risk. That is the reason the equity market gives higher returns than cash for example. It is true that if you take no risk, your returns will be far lower.
However you need to understand exactly what those risks are and to fully understand how much you could stand to lose — there is also “stupid” risk where the risks are too high to justify any reward.
There are ways to minimise risk. The first is through longer-term investing because most of the volatility is short-term. If you buy a quality share for a reasonable price, over time you will make money. However you are more interested in short-term trading.
Because of the volatility (movement) of the JSE the risks are much higher and you should only start trading once you understand how the markets work. You may read articles and books by successful traders, what you are not reading are the stories of the thousands of people who have lost money trading.
The only way to ensure any success is to educate yourself fully. Understand the markets and understand what you are doing.
How to start:
- Go to www.justonelap.com. This is a free online site that educates people on how to invest and trade on the JSE.
- Go to seminars that are regularly offered by the JSE on the stock market (www.jse.co.za)
- Check out share prices in the newspaper and find out more about companies you would like to trade
- Open a trading account with an online broker like FNB Share Invest or Standard Bank’s Online Trading (Standard Bank offers free courses to clients)
- Calculate how much money you can afford to trade with after you have paid all your bills and allocated 15% of your salary to long-term savings. This must be money you can afford to lose. You need about R5000 to justify the fixed costs of trading.
- Start by investing in top 40 shares — these are very liquid and easy to trade. If your broker offers a simulated account where you can trade with ‘pretend money”, start with that first to see if you are ready
- Some brokers send out daily trading ideas, track those for a while and see how they pan out
- Once you have had success with ordinary share trading you can consider moving into derivatives such as Contracts for Difference (CFD) and spread trading. With derivatives you can lose all the money you have invested, so it is not for amateurs.
Three mistakes to be aware of:
- Never take out a loan to trade
- This is high risk money, not your retirement fund
- Don’t waste money on fancy software programmes, these make lots of promises but fail to deliver
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