Highlights in this issue:

    * Don't let massive gains influence your logic...

    * The important role your stockbroker plays...

    * Weigh up the pros and cons of technical software... and more...

From the overworked laptop of Julie Brownlee...

Dear Investment Academy Reader,

Last Friday, we kicked off by looking at the vital components of your trading toolkit. We're going to finish off with that today – so, by the time you've finished reading today's issue, you'll be ready to start trading.

The more you practise – the luckier you’ll get

In investing and trading (and in any facet of life), you’re rewarded for your efforts. Gary Player is often quoted as having said:

“It’s strange – the more I practise the luckier I get.” 

This holds true for trading too. The more you practise, the likelier you are to get a good return.

One way to practise trading on the stock market is to paper trade. Paper trading is exactly like ordinary trading – except you don’t use any money. So you’ll still select a share and decide what price you’re prepared to pay and what you think is a reasonable target; but, instead of buying, you create an imaginary trade and write it down. You then monitor the result over a period of time and see how well you do. I can’t tell you how many people complain about the idea of paper trading. It’ll be such a waste of time they claim, preferring to throw money in straightaway.

Well – the purpose of paper trading is twofold. It assists you in your quest for knowledge – it forces you to learn more about the company you’re interested in and forces you to exercise discipline. While paper trading, you're forced to adopt the routines that you’ll need when you begin trading for real. You’ll check the business paper everyday to see the price of your share. You’ll read the business section to see if there are any stories about the company you’re paper trading. And you’ll start being more interested in stories about world markets and the state of the domestic economy.

Use realistic expectation to avoid costly mistakes

If I could have a cent for every person who’d asked me “What’s a good share for me to buy right now?” I’d be rich! This question is a typical manifestation of unrealistic expectations. Such investors and traders think they’ll be able to make quick and easy money by asking a total stranger what share to buy! If you aren’t prepared to make your own decisions with your funds, why on earth would you be prepared to let some total stranger make the decision for you? I’m amazed over and over again by how naïve and trusting people are...

I’m sure you’ve heard the expression “fools rush in”. This expression's usually used to refer to the actions of the young and in love to define how their rational thought process is overruled by emotion... Well – the same can be said of the gullible investor’s reaction to an obvious investment scam!

Here are a couple of warning signs you can watch to avoid being the "fool" that rushes in:

    * A pressurised sales environment where smooth talking salesmen whip an entire crowd into a frenzy with wild and unsubstantiated promises.

    * The promise of huge financial return in a very short space of time.

    * Hard selling where the salesman insists you have to act immediately to receive the full benefit of his offer.

The stockbroker

The stockbroker is your entry point to the market. As a private investor, you’ll have to open a stockbroking account in order to trade shares.

When markets are doing well, stockbrokers tend to get very picky about the type of clients they’re prepared to accept. They’ll make all kinds of noises about the minimum amount of funds you need to invest before they'll trade for you. I’m not entirely impressed with their attitude at times, but it’s pointless to try and fight an institution.

Ultimately, regardless of your size, you’ll be able to find a broker who'll represent you. There are enough of them around!

A broker might not always have your best interests at heart when making a buy or sell recommendation. Maybe that's a bit harsh, but it’s important to establish and build on your relationship with your broker.

Your broker is definitely someone to include in your toolbox. You’ll rely on him for accurate information on overall market activity, bid offer spreads and any other important "breaking" news when you call to place a trade.

The key questions to ask your broker to make informed decisions

Whenever I phone my broker I always start with an opener like “How’s the market looking today?” Because the broker's on top of the action, he can give me a good idea of what’s happening in real time.

I might then ask him about one or two shares I’m watching, just to feel him out on what he thinks of these opportunities. The important thing is I’m not letting him sway my opinion on the stock. I already have my own idea – I’m just increasing my knowledge by adding my broker’s ideas to the knowledge pool that’s available to me.

You need to remember the broker can be very busy. Many people that I’ve spoken to get upset because they feel the broker has cut them off – or spoken harshly to them. This isn’t usually the intention. Brokers have high pressure jobs and usually work at top speed. They’re in the business of buying and selling shares and don’t necessarily have time to chat.

You can get around this problem by phoning your broker during quieter times in the day. Whatever you do, don’t expect your broker to chat idly with you during market open or the closing auction at the end of the day. They’re simply too busy!

The JSE news service

Companies listed on the JSE must comply with a number of regulations and administrative requirements. One of these requirements is they have to keep shareholders fully appraised of developments that may impact on the price of the share concerned. To this end, the JSE maintains a Securities Exchange News Service (SENS). This system is used to broadcast information to shareholders in a quick and effective way. The main items sent via this channel include:

    * Company financial statements.

    * Advance notice of material changes to expected earnings and revenues.

    * Directors dealings in company shares.

    * Cautionary announcements relating to negotiations that might affect the share price.

You’ll do well to look through any recent SENS announcements for a particular company before investing. Look for telltale "positive" signs. For instance, if there are a number of SENS announcements relating to directors purchasing stock, the company could be nearing some good times.

You can view SENS announcements on the JSE website and on most online brokerages or financial sites.

The technical buffs will want some software

The main reason people buy charting software is to try their hand at technical analysis.

It’s quite ironic that technical analysis scares many people off trading for their own account. They're so intimidated by the price charts and array of technical analysis methods they simply turn in fright and run for the hills!

Plenty has been written on the subject of technical analysis – and plenty more will be. But, technical analysis will never be a perfect science. The techies can say what they want – there’s no instrument or system that'll be able to accurately predict the future price movement of a share with 100% certainty. How do you work out how the markets will react to the death of a prime minister or the disclosure of massive company-wide fraud? How do you factor in the effect of a terrorist attack? Which technical model could’ve accurately predicted the oil price rise seen in the 2009? Technical analysis won't be able to replace the merits of a solid fundamental analysis of a company combined with a degree of environmental scanning.

If technical models could accurately predict future price movements, we’d never have seen the gold mining giants like Gold Fields hedging against a gold price fall by selling much of their gold production forward. [Hedging in this instance refers to the process of locking in today’s price for the future delivery of a certain commodity.] Nor would you see South African Airways recording billions of rands worth of losses in foreign exchange transactions.

If you’re dead keen on trading, then I suggest you add at least one charting software package to your toolbox. You’ll certainly want to be able to look at price charts – and over time, you’ll start using some of the technical analysis methods to back up your fundamental analysis and help you time your entry and exit to the market. Program's include Cycle Trends and ShareFriend. But, bear in mind, these programs and the necessary datafeeds can be pricey.

Gathering information

The best place to start is with your online stockbroker. Most brokerages’ websites include up to date research, analysis and information on a great number of companies.

Alternatively you can use a general information portal like the JSE website or Fin24. Both of these sites offer a large amount of free information. You can use these sites to get general company information on each of the shares you like. You can also find details of financial results and price sensitive announcements through the JSE SENS service mentioned earlier.

Once you’ve done this, you’re ready to get really involved. Find the company’s website on the internet and read up as much as you can about the company’s business, its current projects and its future commitments. You’ll be amazed by what you can learn in a short space of time.

If you still want more, use a search engine like Google to search the web for articles on the company in question. Sometimes you’ll have read some of these articles on the company website; but often this search will reveal even more useful information. As a word of warning – always be sure to check the dates on the documents you source on the web. It doesn't help to be basing your decisions on an outdated piece of research or commentary. By now, I’m sure you get the picture. Use the web as a giant resource to help build a fact-file on each share you’re considering. Then carefully compare the facts to determine which share you like the best... And then you’ll be ready to use your new-found discipline and realistic expectations to find an outlet for some of your investment funds.

Act now

If you’re serious about stock market trading and would like to learn more about technical analysis – then consider purchasing a charting program. I wouldn't suggest you buy this software unless you’re serious about making your own "technical" investment decisions. If you’re  going to base most of your decisions on company fundamentals and analysts reviews, then you really don’t need to spend R5,000 or more on trading software. All the analysts have a wealth of these programs available to them already.

Happy trading!

Julie Brownlee
for The Investment Academy

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