What about day trading?

[Blog #4 on financial markets]

There are five main types of trading that technical traders can utilise:

• Scalping
• Day trading
• Momentum trading
• Swing trading
• Position trading

They involve time frames from between seconds or minutes (for scalping) to weeks and months (for position trading) and everything in between.

A successful technical trader should at least be proficient in several different strategies, but every trader should specialise in one particular strategy and master it. This is dependent on:

• your personality,
• your timeframe and tolerance for risk, and
• the current market environment.

Day trading used to be the preserve of financial firms, professional investors and speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and fund management. Day trading is the system of speedily buying and selling securities throughout the day in order profit from the marginal changes in the market for that particular day.

Day trading can be a fast paced and exciting hobby that depends upon the trader having the most up to date information. Some of the more commonly day traded financial instruments include stocks, options, futures contracts and currencies. In the ideal world, day trading strategies let investors garner profits from the tiny increases in the market. Day trading requires a great deal of time and close attention.

Day trading is not a get rich quick scheme - don't try to make it one. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. Day trading can't really be considered safe investing. You must realise that it may be a zero sum game – for every winner there is a loser!

Make sure you're ready and willing to monitor the near-perpetual shifts that occur moment to moment in the stock market.

Day trading is quite easy once you have the proper education. Technical analysis and fundamental market analysis are both necessary for successful day trading. Technical analysis is the counterpart of fundamental analysis.

Fundamental analysis is basically the ability to analyse a company’s financial strength and determine a decision based on value. Fundamental investors look for stocks that are below their intrinsic value. The objective in fundamental analysis is to make a projection on its future business performance.

Simply put, technical analysis is the process of analysing market (price) action and using past data on charts to attempt to forecast the highest likely outcome of the future. Charts are the primary tool. Technical analysis can be learnt in a short period of time. There are no financial statements to read over. It requires the reading and interpreting charts, their patterns, and determining the highest likely short-term outcome of the future.

Is the residential property market safe?

The residential property market is usually considered a safe investment. However, the fall in house prices is a cause for concern all over the world.

In South Africa the situation is also a cause for concern, but now may be the time to make a safe investment in houses. An excerpt from the latest report from Standard Bank is now available.

Standard Bank: House price growth slipped into red in 2008

What is the latest?
With the data for the final month of 2008 in Standard Bank’s residential property book now available, the annual growth in the median price can be evaluated against previous years’ growth performances. Recall that growth in Standard Bank’s residential median property price peaked in 2004 when a rate of 24.2% (smoothed average) was recorded. Given developments in the economy such as the start in the upswing of the interest rate cycle, the rate of increase declined steadily to 6.6% in 2007. In 2008 the average median property price declined further to 0.3%, the first decline since 1996. In real terms, using the CPI to deflate the nominal data, the decline comes to nearly 12%. On a smoothed basis, growth in the monthly price declined steadily and has been in negative territory since June of 2008. By December the growth came to 3.1%. The residential property book for December 2008 shows that the smoothed value of the median residential property financed by the bank was R592 000. The data reflect a very fragile property market.

While the trend in house prices as depicted by the smoothed data is of general interest, the unsmoothed or raw data is of importance for technical reasons and a variety of other reasons also. For 2008, the raw data show that the median house price declined by 1.6%, down from the 8.3% increase calculated for 2007. The annual numbers mask some dramatic swings in the generally volatile monthly data. Two factors increased the volatility of the 2008 data. The base effects of the distortions created by the introduction of the National Credit Act (NCA) in 2007 were present in the middle of 2008, when strong declines in growth were reported. This is part from the ongoing impact of the NCA which effectively led to a tightening in lending criteria. A second factor occurred when the distribution of property prices changed. This happened later in 2008 when a decline in the number of middle- and lower=priced properties processed was reported. Put differently, the proportion of higher-priced properties making up the bank’s December loan portfolio increased, resulting in a higher median price for the month, as the raw data show.

What are the overall developments in the housing market?
Growth in Standard Bank’s residential median property price peaked in October 2004. The South African housing market has been in the doldrums since mid-2006 when the upward phase of the interest rate cycle commenced. The 500 basis points increase in the repo rate between mid-2006 and mid-2008 placed huge
stress on the economy in general and households in particular. The reduced affordability of housing, exacerbated by higher mortgage rates, high food and fuel prices, a sharply slowing economy, and the implementation of the NCA, led to a decline in the demand for residential property and a substantial softening in house price growth ensued. ... more

Click here the get the full report (PDF).

Learn more: January finance and investment book reviews

Books provide you with the more detailed information to enjoy safe investing. We suggest the following:

Useful South African books (Kalahari)

Understanding South African Financial Markets,
van Zyl, Botha & Skerritt

A reference and guide for commerce students, public servants and the business fraternity, giving an overview of how the various institutions in the South African financial system operate as well as of the different financial markets in the economy and the instruments traded in those markets.Contents: Rudiments of the South African financial system; The South African Reserve Bank; Banks; Microfinance institutions; Regulation of the financial markets; Insurers; Retirement funds; Investment institutions; Risk and return; The money market; The bond market; The share market; The foreign exchange market; and Derivatives.

Economics for South African students,
Louis et al Fourie, Philip Mohr

Economics for South African students is an introduction to economics in general, set against a contemporary South African background. The easy style and many practical examples make this publication accessible. The title covers all the material usually prescribed for introductory courses, and it lays a solid foundation for intermediate and advanced studies in economics.


Useful USA books (Amazon)

The Neatest Little Guide to Stock Market Investing,
Jason Kelly

From the time of its first publication five years ago, The Neatest Little Guide to Stock Market Investing has established itself as a clear, concise, and highly effective approach to stocks and investment strategy. Since the dot.com crash and ensuing bear market, significant changes have come about in the investing world, and The Neatest Little Guide takes this into account. In this revised edition, readers will learn: Strategies on how to double the Dow with one simple investment and the latest products required for this approach; Methods investors can use to avoid disasters such as Enron and WorldCom. Thoroughly updated reference lists, including new websites, new software, new brokers, and new publications. With the right information for investors to keep pace, and rooted in the principles that made it invaluable from the start, The Neatest Little Guide to Stock Market Investing is a resource that no serious investor can be without.

Stock Investing for Dummies,
Paul Mladjenovic,

Stock Investing For Dummies covers all the proven tactics and strategies for picking the right stocks. Packed with savvy tips on today’s best investment opportunities, this book provides a down-to-earth, straightforward approach to making money on the market without the fancy lingo. With a different strategy for every investor - from recent college grad to married with children to recently retired - his valuable reference is a must-have. It also features tips and tricks on how to tell when a stock is on the verge of declining or increasing, how to protect yourself from fraud, and common challenges that every investor must go through, along with resources and financial ratios.

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]

Things you have to know about share markets

[Blog #2 on financial markets]

A major segment of financial markets is the capital market. This consists of the equity, or share, market; and the money and bond markets. We are first going to look at the share market and what it means for safe investing.


The share market
The terms shares, equities or stocks are used interchangeably to describe marketable financial instruments of listed companies quoted and traded on a financial exchange (or stock exchange). These shares represent ownership by investors of the productive assets of listed companies. A stock exchange facilitates the raising of share capital by companies (borrowers) in the primary share market, and the trading of these shares in the secondary share market by investors (lenders).

Companies could source finance through the issuance of share capital or debt (borrowed funds). Share capital is raised through the issuance of shares, while debt is raised through the issuance of debentures and corporate bonds, or the incurrence of loans. The fundamental difference between shares and bonds is that shareholding represents co-ownership in contrast to bondholders being creditors.

Bondholders in their capacity as creditors (lenders of money) of the private company issuing debt are entitled to regular interest payments and repayment of principal at maturity. An investment in bonds delivers a steady cash flow in the form of interest receipts, and bondholders' prior claim on company assets make bonds more safe investing than shares. In normal circumstances, the lower level of risk associated with investments in bonds compared to shares should result in a lower level of return on bonds than on shares.

Shareholders in their capacity as co-owners of the company are entitled to share in profit by way of dividend payments (payments out of profits after tax and other prior claims) and in capital gains or losses (capital appreciation and depreciation). This depends on the market's assessment of the company as reflected by changes in market prices (the ruling share price at the time of the last recorded transaction) of listed shares.


In contrast to bonds, shares have no fixed maturity. Furthermore, shareholders can dispose of listed shares at current market prices in the secondary share market on a stock exchange.

Different classes of share
Listed companies can usually issue different types or classes of share to raise capital. the differentiation between the two main classes of share is based on shareholder priority in terms of rights to the distribution ot earnings (a company's net income or net profit during a specific period). The distribution of earnings to preference shares ranks higher than ordinary shares. This means that the dividends on preference shares have to be paid before dividends on ordinary shares are paid. Ordinary shares are the most widely used type of share. The dividends paid on ordinary shares can be in excess of dividends on preference shares, but the dividend payment remains uncertain, reflecting the higher degree of risk associated with dividends on ordinary shares relative to preference shares.

The two main characteristics of ordinary shares can be summarised as:

• the right to residual claim of income and assets after all prior claims - means that investors bear the full risk of the company and share in the profits by way of dividends only if profits are made after all other payments such as interest on debt and dividends on preference shares,
• limited liability - means that, at worst, shareholders can only lose the capital invested (may not really be considered as safe investing).

Other types of ordinary share are nonvoting ordinary shares, deferred ordinary shares, bearer shares, and nil-paid letters - these are not discussed here.

The primary and secondary share markets
The share market can be categorised as either the primary market (where newly issued shares are offered), or the secondary market where subsequent trading takes place. Borrowers raise share capital in the primary market and investors trade these shares at current market prices in the secondary market.

Issuing activity in the primary market determines the size of the pool of shares available for trade in the secondary market, whereas transactions in the secondary market determine the tradability (the ease with which shares can be traded), marketability (buying and selling shares without an impact on the price), and liquidity (ability to convert shares into cash or to purchase shares at short notice) of the pool of shares, and assist in the price formation process.

The secondary share market can be disaggregated into four markets:

• the formal market where listed shares on a stock exchange (the licensed formal exchange) are traded;
• the over-the-counter (OTC) market, an unlicensed informal market for the trading of shares;
• trades in listed shares off exchange; and
• direct trades between buyers and sellers without the intermediation of brokers.

The trade-off between demand and supply for shares influences the determination of the share prices. Issuers of share capital are also in competition with borrowers and investors in the bond market and other asset markets. Changes in investors' preferences for certain asset classes (financial and non-financial assets such as shares, bonds. cash, real estate etc.) also affect the availability of funding in the primary share market. Switching between asset classes by investors reflects investors' ever-changing assessment of expected risks and returns as market conditions change.

Welcome to the safe investing blog

Hi. this blog is very new and we hope that we can serve the community by sharing unsafe and safe investing experiences. Please feel free to post your experences.
Although this blog is based in South Africa, many of the experiences are global in nature. We hope you will enjoy safe investing.

For those who are interested in finance and investment in South Africa, visit our website at http://www.finforum.co.za/