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| Australian Share Investing Blog |
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Share Trading Tips - An Australian Guide to Investing in the Stock Market
Remarkably, Australia has one of the highest rates of share ownership in the world — something like 40% of Australians are shareholders. What's the attraction?… Well, apart from respectable historical returns, one of the benefits most investors love about the share market is LIQUIDITY. A liquid investment is one which can be easily bought and sold. Compared to other investments with comparable historical returns — such as the property market — shares are incredibly easy to buy and sell, taking about as much effort as ordering a pizza! One phone call to your broker does the trick. Or if that's too much trouble, place your order via the Internet. If you need ready access to cash in an emergency, shares are just as easy to sell — no waiting months, or even years, to find a buyer and dispose of your investment. And the down side?…
Isn't the Share Market Risky???We all know that property only goes up, right? — after all, “they're not making any more land!”. Whereas the share market… well it can crash at any time. The whole thing is just a kind of sophisticated casino. Right? Well, that's often the popular perception. But let's look at the reality…
Here's a chart of the All Ordinaries Index (historically, the main Australian Stock Exchange index) from the Yahoo! Finance web site. It goes from 1984 (as far back as data is available on Yahoo!) to the time of writing. We can see that the index has increased from around 700 points to about 6300 points over the past 23 years — an average increase of over 10% per annum. And this period INCLUDES the “crash of '87”, the aftermath of “9/11”, and the US invasion of Iraq — all periods of pronounced panic selling. What's more, despite all the ups and downs, the increase is remarkably consistent — the market was higher in 1990 than 1985, higher in 1995 than 1990, higher still in 2000, and in 2005, and higher still as I write.
VOLATILITY — Blessing or Curse?Nevertheless, we can see there ARE sustained down periods in the market. The perception of “riskiness” in the share market comes from its VOLATILITY. Although the market does seem to consistently move up over time, it doesn't do so smoothly and predictably. That line is JAGGED. Short-term, the market seems to jump up and down all over the place. The “jaggedness” is what we refer to as volatility. Put slightly more scientifically, volatility refers to the market's ability to move up and down significantly in a short space of time. Ironically, the very volatility that puts people off from investing in the share market, CAN be one of its greatest blessings to the investor. After all, if the market has “the ability to make significant moves in a short space of time”, then it has the ability to return significant PROFITS in a short space of time — profits that would not be available if the market did move up sedately in a predictable fashion. (But I'll save further discussion of the joys of volatility for a subsequent page.) Is there an element of risk involved in investing in the share market? Of course there is! As there is in any investment that has the ability to provide greater than average returns. But you'll soon learn that the risk can be controlled and managed by a variety of techniques including position sizing, stop losses and “hedging”.
Share Trading is Simple — People Make It SEEM Complicated!Seriously. When I watch the stock market roundup on the evening news, I often get the impression that there's a conspiracy in the financial services industry to make the whole business of investing in the stock market seem as arcane and complicated to ordinary folk as possible. Portentous meanings are ascribed to the most trivial of market movements. Traders themselves often seem to rejoice in inventing complicated mathematical indicators to apply to share price charts. Some areas of the discipline of technical analysis of share prices (such as Gann angles, Elliot waves and Fibonacci retracements) seem to owe as much to mysticism as mathematics. And the market is steeped in obscure jargon which makes it seem even more puzzling to most people. Unfortunately, all this perceived complexity tends to make people rely on the advice of others when investing in the market — or avoid the market altogether. Personally, I don't think either option is a good move. I'm a great believer in taking responsibility for your own money and making your own investment decisions, rather than relying on the advice of supposed experts — who often have a vested interest in the investments they steer you towards. And there's no doubt the share market is a great investment vehicle. Apart from the potential of high returns and the ease of buying and selling, you can get started with a small amount of investment capital, and the transaction costs (i.e. brokerage) are relatively low compared to other popular investments such as property.
Time to De-mystify the Market!The truth is, successful, profitable share market investment is not really that difficult. It's simply not necessary to understand all the ins and outs of the market in order to make good profits. In fact, most successful share traders use simple, basic, easy-to-understand strategies. There are strategies that can make you profits in rising, falling, or even sideways trending markets. The goal of Share Trading Tips is to show how ordinary Australians can earn substantial profits from the share market — without taking unnecessary risks — all explained in simple, easily understood language. So let's get to it!…
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