Is Trading for you?

Posted:Abigail Andrews – Saturday, May 26th, 2007

The following sections will make you ask some questions about your own potential to become a trader. This is not a conclusive guide, it is a basic introduction to stock investing. The following sections will provide pointers and basic information. It does not go into detail. There is a lot to learn about the stock market and share investment and to go into detail would be beyond the scope of this site. Therefore, after you have read this guide I suggest you visit the recommended reading page and take a look at some of the share investing books. These are books I have read, or have been recommended, and I suggest before you even think about investing real money you read at least one of them.

Whether you intend to manage your shares yourself, or use the advice of brokers, it is always good to know a bit about share investing, the more you learn, the more confident you will be about taking control of your own portfolio one day.

Have you got the Key Skills?

The more you read, research and learn, the better investor you will become. Successful stock picking requires CONSIDERABLE dedication and effort. If you're not inclined to put in the required time and elbow grease, you'll lose money. If this is the case stop now and save yourself money and heartache!

To decide if you have what it takes to take control of your own portfolio, ask yourself:

• Will you spend time learning how to get your head around some of the complicated figures at the back of an annual report?
• Do you want to get a grasp on how to value a company's share price?
• Are you ready to read book, after book to learn how the stock market works and minimise the risk of your investments?
• Can you make quick decisions and stick to them? Can you learn from your mistakes and not dwell on them?
• Are you actually interested in financial news, the stockmarket, economics, etc, etc?

A lack of inclination and/or ability to do any of the above will severely restrict your investment performance. Most people find economic/financial data boring but to become a SUCCESSFUL Trader you have to read and analyse everything and be on top of all the news day in day out. A lack of inclination to become familiar with any of the above will mean investment ruin.

For those with a fear of numbers, get a broker to manage your investment for you, as you will risk losing all you have in savings, unless you are prepared to put in the time and effort. I discuss alternative options in the, well funnily enough, "Alternative Investments" you may find a better option for you there.

Test your Abilities - Fantasy Trading

OK, most people who read the list above wont be objective. So how do you test whether you have the ability to become a trader. Firstly don't jump in feet first, bide your time, it's a good idea to play the Fantasy Market for a while without using any money. Buy and sell some shares in an imaginary way while keeping your money in a high interest account. Play the game until you feel confident, then tot up how you have done. Be realistic, you need to act as though it is real money. You need to spend time reading and analysing all the information you would if you were using real cash. If you don't, well, stop there.

If you find after a week or two that you "got bored" and just placed random traders based on gut feelings, STOP! You WILL lose a lot of money trading on your own! However, if you show a good profit and enjoy the experience, then consider playing for real. Also compare how your money would have done on deposit in a bank or similar institution.

There are some really great sites out there which you can use such as Bull Bearings and The Wall Street Survivor, give one or both a go. Sign up now and test your skills!

Can you afford to Trade?

To be a stock market investor you need to assess whether you can truly afford it. Never, ever, borrow to play the market. Only speculate with money you can afford to lose. However, if you have a few thousand sat in a low interest bank account, and you would be able to cope with losing some, even all of it, by taking the chance of doubling it, then you could do no worse than speculating on the stockmarket. However, if it is your fund for sending your child to college or your daughters wedding fund, think twice and be aware of the risks!

Assess your attitude to risk!

Ok so you think trading is for you, well one of the things you need to do is assess your attitude to risk to decide what type of investor you are. This is crucial as it will determine the type of investments that will suit you and again may make you realise that you are not cut out to manage your own portfolio. Investment experts tend to put investors in one of three categories: cautious, balanced or adventurous.

Deciding which category you are in depends on how much risk you are happy taking, but there are some guidelines to help you:

• If you are a young investor you can afford to be more ADVENTUROUS with your investments in the hope of getting better returns as you have longer to replace any money you lose. You can also be adventurous if you are wealthy and have plenty of money in other assets.
• BALANCED Investors tend to be those who are slightly older, perhaps with families or who are prepared to take a little risk to get a better return.
• If you want to ensure your capital is completely safe you are a CAUTIOUS Investor and should think carefully about whether investing in shares is for you. This is particularly important for people in or near retirement who would suffer a decline in living standards if they were to lose money.

You also need to consider whether you want income or growth from your investments, why you are saving and when you need to access your investment. All these factors will influence how much you can afford to put into shares. If, for example, you are saving for your retirement in 30 years you can afford to take more risk than someone who is saving to buy a house in three years.

Broadly speaking, you should think carefully about investing in shares unless you can afford to leave it untouched for at least five years. It would be great if your investment were to rocket in value in just one year but shares can be volatile, suffering falls as well as gains. The longer you leave your investment untouched, the greater chance you are giving it to grow – like a fine wine, shares can take time to reach their best.

Once you have decided what type of investor you are, you can start allocating your investments. Corporate bonds should play an important part in your portfolio. Like shares, bonds are issued by companies but are a different type of investment. Rather than linking your returns to the company's profits, corporate bonds pay a fixed amount of interest, known as the yield, and provide little capital growth. This makes them very popular with investors who need income but even younger investors should have some bonds in their portfolio as they tend to be less volatile than shares. This makes them something of a safe haven investment and will provide some security in your portfolio.

The amount of money you put in bonds depends again on your attitude to risk. But as a rough guide, most experts suggest you should have the same amount of bonds in your portfolio as your age. So, if you are 40 you should have around 40% of your portfolio in bonds. Remember though, this is a very rough guide and the amount you should have will depend on your personal circumstances. You can learn more about Bonds in the Alternative Investment" section.

Don’t Forget Property!

If property doesn't feature in your current investment portfolio I strongly suggest you think about that option first. You should also try to have some property in your portfolio. If you are a homeowner you already have this covered but if not, think about putting a small portion, say 5% to 10% of your portfolio, in a property fund. Property funds do not invest in houses but commercial property such as factories and offices so you might want to get some exposure here even if you are a homeowner.

Real Life Case Studies

Lastly, you can read some real life case studies provided by Halifax Bank PLC. I have included them as I think they provide some useful back ground into the availability of share ownership for people like you. Share dealing isn’t just for city slickers. All kinds of people enjoy buying and selling shares. Carry on reading this site to find out your options.

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