Share trading made easy

[Blog #3 on financial markets]

Do you want to build your own wealth and invest in shares, but don’t know exactly where to start? There’s no reason why investing has to be complicated. Investing in your future is smart. In this blog we look at online share trading.

Why trade online yourself? Safe investing can now be accomplished by trading online through the Internet. You effectively eliminate the “middle man” or financial advisor that you would normally just instruct to invest on your behalf. This also means that you end up saving lots of money on professional fees associated with investing through someone else.

Once you’ve committed yourself to investing, it’s important to understand that the more you practice the better you get! Take time doing research about a company you’re interested in investing in.

How do you know whether you’re doing the right thing?
A simple way to test the way you’re going about your decision-making is to practice on the simulated stock exchange which is often provided by your share trading platform.

There’s nothing more satisfying than learning a new skill. By educating yourself, you’ll realize that investing isn’t as complicated as people make it out to be.

Trading costs
Trading costs are an important aspect when you decide to start investing. There are a variety of costs involved so we’ll have a look at how you can minimise them and make the most out of this experience.

The main cost involved is the brokerage fee and is based on the value of the transaction. When you use an online share trading vendor you are minimizing a lot of the costs involved as you don’t take up too much of the stockbroker’s time. You pay a brokerage fee every time you buy or sell shares as well as a monthly fee for holding your shares. This fee structure differs from broker to broker so make sure you find out details from your individual broker.

What’s a fair price?
Before deciding what a fair price is for a share let’s look at some basic investing terms:

• The market for a share (or its trading price) is based on its buy and sell prices, not the last traded price.
• If you place a market order, you’ll be asking for the market price. This means that you must either buy at the lowest sell price or sell at the highest bid for the share.
• You are looking to buy shares at a fair value – this is the value that is considered to be reasonable in light of all the circumstances – how the shares are performing, what the growth prospects of the company are etc.
• Remember that if you are investing for the long term, you shouldn’t be too concerned if you see some fluctuations in the share price – if you see a bit of a dip don’t stress out and immediately sell your share – look carefully at why the share price has dropped and then decide whether it’s worth selling.

Practice, practice, practice!
Most share trading vendors offer simulated trading or a real-time stock trading game. It’s the perfect facility for you to learn how to trade, and because no “real” money changes hands, it’s completely risk-free!

You can visit SharePlanner and TheStreet.com in the US and Sharenet in South Africa for further information.

Test out your investment theories and strategies through simulation and you’ll get the peace of mind that you’re reading to start trading in the real market before you know it!

The real trading process
Once you’re ready to actually buy and sell shares on the market it’s helpful to understand how a trading system actually works. The stock exchange trading system matches buyers and sellers for each listed share. The trading system continuously looks to match bids and offers, comparing the new orders and those on the system to each other and executing trades whenever they match.

Market depth is an important aspect of this process – this is when you’re able to see the volume and price of all buyers and sellers in the market for a particular share. Viewing this information will help you analyse how that share is performing over a period of time.

Also have a look at the bid/offer spread on the share – basically what the buyers are prepared to pay and what the sellers are prepared to sell at. Once you have established what the last price traded was and what the above “spread” is, you’ll be in a good position to decide what price you can bid for the shares that you want.

Once you’ve decided on the price, you need to decide whether you’re going to place a price limit on your order or if you’re going to place an “at market” order. A price limit means that you tell your broker what the maximum price is that you’re willing to pay for that share, while the “at best” order is based on what the sellers want. It is generally recommended that you place a price limit order as prices can change very quickly and you don’t want to receive a nasty surprise if you pay way more or less for the shares you want. Once you’ve bought your shares, you’ll receive a broker’s note as confirmation of the trade. The funds will be deducted from your account on the settlement date.

In later blogs we will look choosing shares and at how official investor protection enables safe investing.

[based on the ShareNet report Guide to Investing on the JSE]