How to profit on the stockmarket

IT'S not surprising that people's interest in investing rises in tandem with the stockmarket.

While many see stocks as a quick way to make money, others see it as a good place to build wealth over the longer term  regardless of the volatility along the way.

Due to the transaction costs involved in buying and selling shares directly, investors are becoming increasingly interested in derivatives such as CFDs and options.

As well as being worthwhile investments in their own right, derivatives are used to protect, or hedge, share portfolios against volatile, uncertain or adverse market movements.

CFDs

A contract for difference (CFD) is a derivative that mirrors the price of a range of underlying instruments such as shares, indices, sectors, commodities or currencies.

The chief market analyst at CMC Markets, David Land, says CFD trading is very similar to share trading with the added benefit of trading on margin.

Share CFDs can be traded on a 5 per cent to 10 per cent margin deposit (for the top 200 Australian listed shares), which means you only need a small fraction of your trading capital to enter a trade, allowing a more efficient use of your trading money, he says.

Land says any investment that carries leverage comes with its risks, which should be properly managed.

With CFDs, the most common way of doing this is to use stop-loss positions  where the exit price is predetermined  within a broader trading strategy.

Designed for sophisticated traders and investors, CFDs allow greater flexibility to trade within falling markets than direct shares. For example, you can go short (sell CFDs) to take advantage of falling prices, just as easily as you can go long (buy CFDs).

OPTIONS

Another favourite of traders is options, which give an investor the right to buy a certain stock at a certain price. Options allow investors to buy (call options) and sell (put options) the rights to company stock at a set price for a certain time period.

There is no obligation to exercise an option, so if the underlying share price of a company moves unfavourably and an investor decides not to exercise the option, the most they spend is the cost of the option.

LEARNING TO TRADE

Professional trader Louise Bedford says it is possible to teach people with limited sharemarket knowledge or experience how to make money.

With a background in psychology and 20 years' experience in trading, Bedford says the three most important things to learn are: how to adopt and implement a trading plan a trading system (when to enter, exit and how much to invest) and how to manage your own psychology.

We find that people's level of income does not exceed their level of development and that everyone can be better equipped to handle the profits and the losses they incur as a trader," Bedford says.

She says the biggest mistake people make is not realising the importance of money management. Traders often put too much money into high-risk trades and too little into lower-risk moves. The tradinggame.com.au mentor program, which is run by Bedford and business partner Christopher Tate, a trader with 30 years' experience, incorporates face-to-face meetings as well as online contact.

We look at teaching people every instrument, over every time frame and create a customised trading plan that fits into their life," Bedford says. "Because our mentorees can repeat the training as often as they like for free, they also create lifelong trading friendships along the way. We also match people up with a trading buddy who has experience in the course and trading, so each mentoree receives the hands-on support that every exceptional trader requires.

The idea is to put money into share traders' pockets and make it stick even if they only have half an hour a day and limited experience in the sharemarket.

EDUCATION

The Australian Securities Exchange(asx.com.au) is active in online education, with online investment classes and resources that can be accessed or downloaded for free.

As well as answering simple questions on stockmarket basics, like what are shares, it is possible to work your way through an online course and learn about everything from how to invest to share investment strategies and record keeping.

There are similar online courses covering other securities such as options, CFDs, futures and warrants.

There are plenty of seminars to learn about shares and investing generally.

The not-for-profit Australian Shareholders' Association runs about 30 seminars a year in capital cities and major regional towns. Pitched at everyone from novice investors (investing for beginners seminars) to advanced shareholders (financial statements demystified) the seminars cost between $50 and $95 depending on whether they are half-or full-day.

Non-ASA members are required to join the ASA ($115 a year) to attend seminars.

The seminars  some of which may take the form of workshops and interactive sessions  are presented by industry specialists.

For a full list of seminars, see asa.asn.au.

CASE STUDY

WITH a career in the electricity industry, Caroline Semisi had a feel for how financial markets worked but it wasn't until she started trading her own money in 2001 that she discovered she had more to learn.

I went to a personal development course which had an options trading day," Caroline says. "I did a couple of paper trades and thought I was a guru. Then I used my own money and lost quite a lot in my terms and realised I needed to learn a bit more.

As well as reading books such as The Art of Trading by Chris Tate and attending a couple of seminars at the Australian Securities Exchange, Caroline did an online mentor program run by professional traders Louise Bedford and Chris Tate of tradinggame.com.au.

It was an online forum. It won't be for everyone but it is the best thing I have done, she says.

It is what she learnt about herself, as much as how different financial instruments work, that gave her the biggest boost to her regular trading.

My weakness is in the detail," Caroline says. "It is really challenging for me to update my position and my stop losses. The course really helped me to identify that and that the details matter, otherwise the market will teach me the hard way.

Another pearl of wisdom was how to become emotionally detached from the money side of trading and to look at each chart as just a chart.

Caroline says she is constantly learning about the market and trading, generally through books or the occasional course.