#01: Trading vs. Investing

Welcome to the first in a series of short videos created to give you greater insight into whats involved in becoming a successful stock Market Trader. I'm Jeff Bryant, Senior Trainer with HomeTrader, one of Australias leading providers of Stock Market Education. Over the next 12 episodes, I'll be covering the key requirements for developing a profitable Trading Strategy. This includes the difference between Trading and Investing and how to use Risk Management to PROTECT your capital by minimising your losses -and maximising your profits. Well also be looking at WHEN & HOW to buy shares, making sure you not only buy the RIGHT stocks, but buy them at the right TIME. Getting OUT of your trades is even MORE important. We'll look at how to pick your Exit Points, so you lock in profits - and AVOID selling too early. Later in the series, well be looking at a variety of different Trading Strategies, including Trend Following, Mean Reversion, Rotational Trading, and Short Selling. Well also look at trading tools, how to read charts, back testing - and using CFDs to leverage your cash. So, lets start with the basics. When we OWN a stock, what do we want to see happen? Obviously, we want the price to go up! I call this the Prime Criterion. Simple? Of course! Well, well see (knowing grin) Most people are Investors. Their strategy involves buying shares & holding onto them for the long term hoping theyll go up in value, while picking up some dividends along the way. They're in for the long haul. The Trader is different. We conduct our business over much shorter time frames. For the Investor, the overriding concern is that theyre looking for SECURITY. This is why people tend to buy what they refer to as Blue Chip stocks. People who bought Bond Corporation shares wanted that sense of security, as did those who bought Quintex and HIH. Similarly, Pasminco, Onetel, Sons of Gwalia, ION, HWE... What have all these companies got in common? They all went to the wall. Shares held in these companies worthless. So much for that sense of security! As Traders, we say, No! HIH is a great example. Things were great for a while, through into the mid to late 90s, then - CRUNCH! This brings us to the second key difference between Investors & Traders - The Trader has a plan to sell an exit strategy. We much prefer to get out around here and move on, rather than get caught hanging on to something like this. While the poor old Investor is stuck, hanging on & hoping, all WE have to do is listen to what the market is telling us - and well know WHAT to do - AND when to do it. So why do people trade? While the reasons can vary almost infinitely, the bottom line is always the same. Were looking for better returns. Better than what? Better than Bank Interest, the average Investor, average fund, Superannuation, Real Estate - or just better than youre getting now. So how does Trading give you better returns? The average investor just gets average market returns. Now, obviously the magnitude of these depends on the timeframe used ... But the best compound rate the average investor could claim over recent decades, would be if they started in the mid-80s and at just 7 percent per annum, thats hardly spectacular. In fact, its about the average rule of thumb for Real Estate. As Traders, our exit strategy gets us out of the WAY of poor markets, like 2002/2003 and, of course, 2008. And so by avoiding the big losses, our average returns can be higher. Id like to close this session with a quick look at the market in general. Two things are immediately apparent. Firstly, it doesnt move in a straight line ... It goes up - and it goes down. Obvious, perhaps, but something well come back to, later on. Secondly, driven up by macroeconomic factors, the long-term trend is up - and the market has never failed to make new highs. Despite the global correction in 2008/2009, we believe it will AGAIN lift to new levels. So it might be a good idea to learn how to take advantage of that. All right - weve learned the difference between Investing and Trading - and that the Trader is looking for better returns, and that we should prepare NOW for the next recovery. In the next episode, well be looking at why it is absolutely vital, before we enter the market, to develop a sound Trading Strategy. Of course, if youd rather not wait, just visit the HomeTrader web site, at hometrader.com.au and enrol in one of our Free 2hour Information Seminars. Thank you.

Comments