How To Plan For Success In The Share Market
To trade shares in the stock market successfully you need a strategy. This strategy is known as a stock market share trading system. The stock market share trading system is a set of rules that tells you what to do, no matter what the market circumstances.
Your trading system forces you to make decisions based on proven market patterns - rather than emotions - and this forces you to profit.
A share trading system is made of 5 components:
* Style - Definition of share trading objective
* Entry - Conditions required to enter share trade
* Risk - Rules to limit losses
* Exit - Rules to define share exit points
* Testing - Proving the share trading strategy by testing it before you trade with REAL money, to make sure it makes the returns you wanted.
If you choose to enter the stock market without a plan, these are some of the pitfalls you may encounter:
* Choosing share investments that just don’t make money
* Choosing shares based on gut feelings, rumours or RED HOT tips
* Taking a punt
* Being at the mercy of investment advisers who will earn a fee whether you succeed or fail
* Choosing from a limited range of products because you don’t have all of the information
* Spending a lifetime studying information on companies and their staff to see if it will tell you what to buy and when
* Having an approach you just can’t test
* Risking and losing your nest egg
Risks You Should Be Aware Of
Although this article does not provide personal financial product advice, you should be aware of the main risks associated with investing in listed equity securities. Some of these risks are outlined below:
* Overall market risk - This is the risk of loss by reasons of movements in a market sector. These can be caused by any number of factors including political, economic, taxation or legislative. Specific examples include changes in interest rates, political changes, changes in superannuation laws, internal crises or natural disasters. Market risk can be minimised by having a spread of investments across different types of assets.
* Global risk - This is the vulnerability of an investment to international events or market factors. This would include movements in exchange rates, changes in trade or tariff policies and changes in international or bond markets.
* Sector risk - The risks associated with an industry’s specific products or services such as, demand for the product or service; commodity prices; the economic and industry cycles; changes in consumption patterns; lifestyle and technology changes. This may be minimised by detailed research to identify quality investments, reviewing their performance and their place in a portfolio.
* Equity specific asset risk - risks associated with the specific investment, for example, quality of the company’s directors; the strength of management and key personnel; profitability and asset base; debt level and fixed-cost structure; litigation; competition levels; liquidity of the investment.
* Timing Risk - The possibility that you enter the market at a bad time, for example, just before a fall in the share market. This can be minimised by not investing all of your funds into the market at one time.
* Speculative Risk - If an investment is described as speculative, you should be aware that the investment could rise significantly but also fall by the same degree. You should not invest in speculative investments unless you understand and accept the risks fully and are prepared to accept any resultant loss.
Jon Lynch is Marketing Manager of the Capital Intelligence Group of companies, including HomeTrader - Australia’s leading share trading education centres. We focus on teaching you how to create wealth through the share/stock market using a customised trading plan or system that is right for you, your situation and your goals. Visit our website and register for your free introductory DVD “Learn To Make Money On The Stock Market” at http://www.learnshares.com.au
