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Investor PsychologySMSF Strategies

Aussies more interested in trading shares

19 Nov 2021 2 month(s) ago

But is it gambling? There are certainly some perils.

It is common for people to characterise investment in the stock market as gambling. This is not true. Provided you do not follow the herd and buy at the top and sell at the bottom – it is called the herd because unfortunately that is what a lot of people do – then you should get a sound return over time. Whereas in gambling the house always wins, in share investing the house is neutral and most players win – or should win.

It becomes a little more like gambling when you punt on an individual company, especially one that is a start up. Then you are taking a risk on the management and their ability to create profits. Often, it proves to be a poor bet, which is why diversifying broadly, or using index funds, tends to be a lot safer.

Then there is trading, punting on the direction of stocks in the short term. This really is gambling. Short term share price performance is inherently unpredictable, not least because it is not necessarily influenced only by performance but expectation of performance. Often companies can come in with great quarterly results only for the stock price to fall. That is to some extent an unexplained mystery, but it seems to partly involve investors expecting more from the result.

So it is not necessarily good news that some research by Global Prime is showing that Australians are getting more interested in trading because of the pandemic, although it is better news that they are more interested in investing. Global Prime says:

“The COVID-19 pandemic has been a challenging time; with lockdowns, unemployment, and an uncertain future ahead. However, new research reveals that the pandemic has also prompted more Aussies to start thinking about their long-term financial future.

Key statistics from the research include:

  • One third of Australians (31%) said yes to becoming more interested in trading or investing since the pandemic began in 2020
  • Almost half of Gen Z (46% of 18-24 year old’s) have become interested in trading and investing since the pandemic began, this was closely followed by millennials (42% of 25-34 year old’s)
  • More men reported an increased interest in trading (38%) compared to women (24%)
  • Older generations were the least likely to be interested in new investment strategies; with only 9% of people aged 65+ saying that they become more interested in trading.

Responses from the research participants indicate that many of the people who began online trading during the pandemic were drawn in by shares trading lower than usual, in the hope of making a substantial profit.

Furthermore, the research found that Australia-wide, on a state-by-state basis, Victoria and NSW have seen the most growth in this area. 37 per cent of Victorians reported becoming more interested in trading and investing because of the COVID-19 crisis, followed closely by 35 per cent of people in NSW. Considering Victoria and NSW experienced some of the harshest lockdowns world-wide, it is interesting to note that the possibility of economic instability has not deterred many would-be investors, especially amongst those under the age of 30.”

Global Prime makes some observations that are hard to argue with. There are certainly dangers in trading:

  1. Be realistic about your returns on capital: Remember, this isn’t a get rich quick scheme, and often slow and steady wins the race. Do your research first, start off small, and once you build your confidence and skill take your trades to the next level. Also, beware of brokers offering super high leverage. If a broker is offering 500x leverage, then they are most likely profiting from your losses. They know full well that this is disastrous for most beginners, yet super high leverage is marketed as something you need to trade with, when really you don’t need it to be a successful trader. 
  2. Risk management is everything: If a trader goes in without a good understanding of risk management, they are more likely to lose. Trading involves risk of capital loss, especially when trading with leverage. There are risks such as black swan events that may wipe out an entire account if the trader took on too much exposure (risk) on their account.
  3. Ask to see trading receipts: Brokers trading against clients and profiting off their losses is a common practice in the CFD trading industry. This practice is also known as ‘B-booking’ and means the brokers interest are not aligned with yours. Ask your broker if they have any sort of system that shows which bank has filled your trade. If they don’t, then you won’t be able to know for sure that they aren’t profiting from your losses.
  4. Psychology and learning to control your impulses is paramount: You could have the best strategy in the world, but without the right mindset a trader is bound to lose eventually. A trader needs to be cool and calculated and not adjust their trading based on their emotions. Unless a trader has learned to manage their impulses and emotions, they will most likely run into problems.
  5. Plan your trade, trade your plan: Trading without a plan can and should be likened to gambling. Eventually the ups and downs a trader goes through will lead to poor decision making and ultimately to the loss of capital.  Having a set plan and strategy in place and journaling trades helps to stick to the plan which means not making decisions on the fly. Knowing when to enter and exit a trade BEFORE the trade is entered and not adjusting mid trade will help you to stay on track.
  6. Find a trading mentor: It’s information overload online when it comes to finding a strategy to trade with. A trader must find a strategy that works for them and their circumstances, and it can be tough for a beginner to sift through the information and formulate a plan. Having a great mentor can really help push a trader in the right direction, and if they take it seriously they can be held accountable to their trading mentor as well, just like a sporting coach.

 

 

Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.

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