Wealth

Part 4 - TRADING STOCKS

You will first need to choose an on-line stock broker and set up an account. They all operate much like banks as they are legally required to know their clients and must report to government tax collectors on any income to your account. Most large banks have a brokerage. In Canada, the TD bank has TDWebBroker but you may choose an independent broker like Questrade.com. Most charge a fee for buying or selling stocks and ETF's but some do not.

First things. Keep a diversified portfolio of shares (aka stocks) either by holding ETF's or buying a variety of stocks in a variety of businesses.

Forget what you paid for a stock! The market does not know, and does not care what you paid. Remember that you are always buying a stock from (or selling to) someone who is willing to sell, or buy, at the ASK price. If you want a lower price you can offer to buy by putting in a BID price but you may have to wait. The quickest way to buy or sell is at the MARKET price. This means that you agree to accept the price on offer at the instant your order goes through. But check that trading volume is high and the BID and ASK prices are close.

If you decide to buy a stock, avoid buying one that has had a huge increase and then selling if falls sharply. If you miss a selling opportunity and have a large loss, make sure that the stock is not about to bounce back before you sell. Some investor like a stock and only buy when it falls in price and then patiently wait until the stock price moves back up. Most stocks tend to recover but some will just go sideways for a long time or, worse, go even lower.

You can lose money on individual stocks but you can reduce the risk of losses by;- learning as much as you can about a stock or ETF before you buy. Your broker's web site will provide a lot of information and you can get more from many other sites. For example, https://finance.yahoo.com provides free information (you do not need to log in) on stock prices and news.

If you have an account with TD WebBroker, you can compare any stock's price with other stocks in graphical form over various time period. So you can see at a glance which stocks are performing better than others.

Most web brokers allow you to practice trading without using money so that you can learn how the web site works and how to trade without losing (or making) money.

Buy if you think a stock is going up and sell if it goes down; this is more difficult if you have lost money. But do not be too concerned if a stock drops a little if you are sure that the company is growing.

Be careful about sharp price movements on 'news.' Quite often, the news is put-out by people intent on manipulating the price to their advantage. Pump-and-dump schemes and short sellers are forever with us. But sometimes the news may be accurate and a stock price moves rapidly up or down. Either way, it will probably reverse course as it reverts to the mean (or average).

Companies having a relatively low Price/Earnings (P/E) ratio tend to be less risky. Canadian banks for example typically have P/E's around 12 whereas some growth stocks like Shopify (SHOP) have very high or even no P/E ratio meaning the company is not profitable but investors expect it to become profitable in future. This is quite normal for newly established companies that are growing rapidly. 

But, a low P/E may be a sign that the company is not growing and investors have lost interest. Normally, avoid companies with a low P/E because that may mean the company is in trouble. Check the earning and compare this with the dividend payout and any large debt.

Strong companies typically have dividend yields of 3% to 5% because investors believe the stock is growing. A long run, winning strategy is to buy companies with a track record of increasing dividends each year.

Check to see if quarterly earning are increasing. Check historical price movement to judge volatility and trends.

Buy less volatile and less cyclical stocks, or trade on the swings. Generally use stop-loss, sell orders (sell stocks that drop more than 10 or 15% in price). Selling stocks at a loss is psychologically difficult but it is essential, if you are to make gains over the long term. Holding on to stocks that have lost the interest of investors is a sure way to lose money. Check the volume (number of shares sold per day or month or any other time period. Higher than average daily volume suggest more investor interest and low volumes indicate buyers are losing interest.