Trading for beginners by Warren Abels

Many people are afraid of trading on the stock market. Some are put off by horror stories of someone losing all their life savings, some are intimidated by the amount of jargon and information related to trading, while others simply never think of it as an option. The average person with no trading experience envisages a Stock Exchange as an institution accessible only to professional stock brokers and rich old men with nothing better to do. Obviously there are many different strategies and options available, but this is a general guide for the layman on how to get started. It’s not as complicated and unfathomable as you might think.

Firstly, as a novice, you should definitely think about getting yourself a good broker. You will benefit from having their advice at your fingertips (because at first you will second guess every decision you make) and they should also supply you with educational material and reports that will enable you to get comfortable with trading with a bit of a safety net.

Secondly, start with an exchange traded fund (ETF) that will expose you to a range of top companies. ETF’s are investment instruments that give investors the cost benefits of pooled investments and the convenience and tradability of listed shares. With ETF’s you can slowly build up your knowledge with your broker’s help until you are confident in buying shares on your own.

Once you feel you have the hang of things, you need to decide if you are a trader or an investor. A trader will buy and sell shares frequently with the aim to make short-term profits. This is more risky as you are continuously speculating on where the market with go in the short term, but it is also the most exciting. Investing essentially means that you need to find a company (or companies) that you feel will provide great returns in the long term based on your research and their track record.

Thirdly, and probably most importantly, do not invest emotionally! A lot of beginner traders like to buy when market news is good, invariably meaning that the shares are more expensive, and sell when the market starts to crash and shares are being sold at a lower price, resulting in a loss of money. People also see the stock market as a get-rich-quick scheme. They bet on tips they hear at dinner parties without thoroughly researching the company they are investing in. It’s important to realise that people who trade on the stock market usually talk about the shares they have made money on, not the shares that have lost on. This creates the perception that there is easy money to be made and traders simply rely on the luck of the draw. In reality it isn’t that easy. It takes steady emotions and research.

The best general strategy is to build up a long-term portfolio consisting of the following:

1. Shares in Top 20 companies which have a proven track record and are already household names. Make sure to buy in different sectors, for example fuel, mining and telecommunications in order to spread your risk.

2. Some investment in large to medium companies which are established but still offer potential growth, for example large retailers like clothing companies or food manufacturers.

3. A few shares in small but promising companies. Although these are the most risky investments, they can also be the most rewarding. Make sure that you’re ready for a long and bumpy ride with these shares and do your research.

Once your portfolio is established, that is when things really start to get interesting!

Good luck and happy trading!
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