Understanding yourself can be the cornerstone of success or failure in the sharemarket. Your attitude to money, risk and also success is unique to you, so a system that works well for one person may not necessarily result in success for you.
So 2009 is the year to understand yourself — your financial attitude, your goals - you’re your tolerance for risk.
In short, it’s the year to have a financial plan. Without a plan, investors often rely on gut instinct or emotions. You know the saying: “To fail to plan is to plan to fail”. The sharemarket can be a crazy place at the best of times. A plan helps you to get to your goals even if the market does seem illogical.
In the market, we can’t control the return we get from shares. One thing you can control however is risk.
Now, risk is not about maximising returns. It’s about minimising the losses. In fact, if you wanted to maximise returns, you would also need to maximise the risk involved and probably invest in just one stock. But most investors aren’t willing to put all their eggs in one basket. We’ve learnt through stocks like Allco that the risk is too great.
If you are a trader, than a golden rule of trading is to have trading limits. A price limit protects against unlimited losses. A stop loss order is one where you sell your shares if the price falls to a certain level. It’s a good idea for when you are on holidays or cannot watch the market. A stop loss order takes the emotion out of getting out of a position when it is falling.
All in all, share prices aren’t just prices moving up and down, up and down but a reflection of a company. If you were interested in buying your local corner shop, you’d look at things such as management, if profits were improving and if there were competitors taking away market share. Shares are essentially a share in a business and while it may not be your local corner shop, the concepts are very similar.
Often the sharemarket can seem a daunting place but if you keep in mind that the sharemarket is a market full of businesses, it makes a little more sense. Businesses that are increasing their profits are increasing their business value and share prices should rise over time.
And that, I believe, is the key to long-term gains in the market.
Don’t forget, like anything that you want to make a profit on, the key is to buy low and sell high. It’s all fine and well to find a strong business but you want to be able to bag it at a bargain. If you buy it cheap, your journey to making money is halfway there.
Sometimes that is going to mean acting the opposite way to the crowd. So don’t rely on greed and fear to drive your investment decisions. Focus on logic. The sharemarket can be a great place to make money for business minded investors.
Wishing you a prosperous and happy new year!
Julia Lee Equities Analyst Bell Direct
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