From the pen of Karin Iten…

Dear Investment Academy Reader,

One of the areas Investment Academy readers experience the most difficulty with is the execution of their first share transaction. So, this week, I’ve asked Red Hot Penny Shares' expert, Greg Lecoq, to show you some of the most important aspects of doing just this.

Here’s to your financial freedom,

Karin Iten
for the Investment Academy

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Over to you Greg…

Every week, I get a handful of emails from readers with the same question: “You give me all these great investment ideas, but how do I get started? And how do I ensure that I get in at the right time?”

And that's exactly what I'm going to help you with today.

Step #1: Invest smart by buying at the “right” price

The first, and most important, lesson when buying a share is to get in at the right price. It doesn’t help to place a market order with your broker and then watch helplessly as the broker buys the share at a level way above the buy in price.

How do you do this? you ask.

Simple, phone your broker and place a limit order for the share. If you follow the share suggested in a share tipping service like Red Hot Penny Shares, for example, you should be given a buy range – this is the price the tipster belives the share is good value at. And remember while a limit order doesn’t guarantee you’ll purchase the share, it will prevent you from overpaying for it.

For example, let’s assume one of the shares you’re interested in purchasing has a buy range of 100c to 110c. But when you phone your broker the share is already trading at 115c. If you tell your broker to buy at market, you’ll pick up the shares at 115c or more. The price you pay will already be almost 5% more than the “good value” range. And that means you’ll pocket less profit when you sell it at a later date. To make sure this doesn’t happen, rather place a limit order at 110c – and wait for the order to be filled. You do this by telling your broker to place an order for 5,000 shares at the price of 110c.

He’ll ask you for how long you want the order to be valid – and you can specify the number of days (I suggest about 7 days). If your order isn’t filled, then no damage is done. You won’t get the shares – and it will have cost you nothing.

Remember, sometimes it’s better to sit on the fence rather than plough in at too high a price.

Step #2: The ideal transaction size

Secondly, let’s talk about order size.

A lot of you are probably trading with small amounts of start-up capital. There’s nothing wrong with starting small. But you must avoid buying shares in very small quantities. Try to limit yourself to a minimum trade size of R5,000. This will help keep the brokerage fees and other charges on your trade to a minimum.

So, if you have R10,000 to invest, rather buy two shares for R5,000 each. Don’t split your capital into four small trades of R2,500. It’ll cost too much in brokerage and other charges.

Let me show you...

Let’s say, for example: Mr Jones decides to buy 1,000 ABC shares at R1 each. He calls his broker, and the trade goes through immediately at the specified price. He’ll soon get his contract note, showing a total cost in brokerage and other fees of R125.60*. The result is a massive 12.56%* of his R1,000 investment being eaten up by brokerage and other charges.

But if Mr Jones buys 5,000 shares at R1 each, these fees will only amount to R203.44*. As you can see, the percentage on investment of his total brokerage costs will be just 4.07%*.

(*Note: This is a hypothetical example, Broker fees will vary between different stock brokers.)

Step #3: Choose the right broker

Finally, when it comes to trading shares on the JSE, nothing is more important than choosing a broker who suits your needs.

And remember, the only way to build a winning portfolio is to act now. If you aren’t trading, you’ll never benefit from the incredible gains you read about each month in the material sent to you by The Investment Academy.

So what are you waiting for? Open your investment account today!

Happy investing,

Greg Lecoq
Red Hot Penny Shares analyst