All investments, whether of your time, effort, or money, require some research for safety. Thank you for including this article in your share trading self-education process. Investing your money can be a daunting task, filled with concerns.
What we’ll look at together are the key priorities to start trading successfully, such as; How you Make Money, Risk Management, and How Shares Work. Let us start with that last part first, and understand the meta-language of trading.
How Shares Work
A Share can be described as Stock, Security, Holding, or Equity in a company. All of these represent a small portion of the overall company Capital. Owning them makes you a Shareholder. Shares are publicly Listed and Traded on an Exchange. In Australia, the Exchange is called the ASX Exchange, New Zealand NZX.
A Share has a “buy” price called a “Bid” and a “sell” price called an “Ask”. Share value is influenced by various factors such as; company performance, economic conditions, and the market view of a particular company or industry sector. A Stock Index is a list of all Stocks created to gauge industry groups or sectors of the whole Market.
To Bid (buy) or Ask (sell) you will trade through a Stock Broker. This is a company licensed to trade on the Exchanges. Some offer advice and guidance, while others prefer investors do their research. It is important to give them a clear picture of the goal you have with your investments.
They are professionals in a business where you are a beginner. Do your research on them and ask your close friends and family whom they use and why. Volatility is how quickly a given stock or market gains or loses value. When values are on the rise the market is called a “Bull Market”. The falling market is called a “Bear Market”. Money can be made in two general ways.
Making Money
When you trade shares in Australia consider these two methods of making money. Share value has the potential to increase in value over time. Called Capital Gains, this money is the difference between Bidding low and Asking high.
Bidding high and Asking low is a Capital Loss. Companies can offer forms of Dividends based on company profit or other reasons, paid either ad hoc or annual basis. If you are looking for paced income from your investments, this is a good factor to look for in the companies you intend to invest in.
Risk Management
Understanding the Risks of an investment is paramount to your success. We can put them in two categories; Volatility and Absolute Risk.
Absolute Risk
Simply put, this is a risk that your shares are devalued to zero. An example would be company closure. Using caution and more research into stocks that are highly outpacing Index rates is a good way to find opportunities and avoid catastrophic results.
Volatility Risk This is a market-based risk that includes factors such as; profits and economic conditions. Your stock value is set at the moment of transaction. If you see your stock value decrease on the exchange, you needn’t worry unless you sell at that time. Prior company performance is not a sure indication of future performance.
Risk Mitigation Tactics
Here we must have the mindset of not “Putting our eggs in one basket”. If you place all your investment into one company and it fails to grow, so will your investments. When invested entirely into an industry like Aviation, with one mishap all your progress could be lost or much worse.
This is called Diversifying your Holdings. With experience and guidance, you can Diversify your investments to include Interest Securities, Term Investments, or Exchange-Traded Funds. We will not discuss these here but they are something to add to your research for later consideration.
Short-term investments are usually high risk/high reward. If you are underinvested and need to be more aggressive to reach your investment goals in a certain time, you may include some of these in your portfolio but use caution.
Longer-term growth is slower and more controlled or less risky. In your planning look for projections of company growth that outpace inflation to make it worth your while. Research, Research, Research. Knowledge is key.
Become a student and take in as much information as possible to provide the clearest picture. Never approach an investment with the attitude of “I will see how it works”. You owe yourself better peace of mind than that.
Closing
Congratulations. Don’t stop here. Continue your learning by following the link in this article.
