7 Steps for online share trading
Thanks to online share trading, anyone with a computer can invest in the stock market. Here is the step-by-step guide on how to start trading online and building your investment portfolio.
Shares have shown the highest returns in the long-term, outstripping other assets such as bank deposits and even property. If you’re ready and willing to invest your hard-earned cash, however, you will need a strategy. Share trading can be tricky and has several risks associated with it, which means you really need to know what you’re doing before you risk your savings.
What is online share trading?
Online share trading is when you buy and sell shares frequently, with the aim of making short-term profits. Standard Bank defines a share as a slice of a company that, technically, means the owner has a small claim on that business’s earnings and assets.
Electronic stock exchanges provide investors with two advantages:
- It reduces the risk of investing by providing a transparent pricing mechanism for trades
- The listed companies are policed. A stock exchange operates in a strict regulatory environment and businesses have to comply with a strict list of requirements.
If you’re new to investing, then a good place to start is to purchase an exchange traded fund. This can be purchased through a good broker, and will give you access to the top South African companies.
Steps for Online Share Trading
Read on to find out more about online share trading:
- Find a broker
- Open a trading account
- Do your research before investing
- Build a long-term share portfolio
- Understand the risks
- Speak to the experts
To start investing in shares you’ll first need a brokerage account. As a new investor, selecting the perfect broker can be challenging. It requires some careful thought as not all brokers are right for all investors.
There are two types of brokers out there:
- Those who deal with clients directly
- Those who act as intermediaries between you and a larger broker.
You’ll also need to decide on level of service. A full-service broker will do a significant amount of the legwork, and provide you with advice, suggestions and research, but these services can be costly.
A discount broker is a stockbroker who carries out buy and sell orders at a reduced commission compared to a full-service broker but provides no investment advice. Discount brokers often make more sense for the average investor because they're more affordable.
- If you want to start investing directly Standard Bank’s Online Share Trading has a product called Auto Share Invest (ASI). It enables you to invest directly without the monthly debit order and is relatively cost-effective for smaller investments.
- How it works is that monthly you invest R500 or more and on the 25th of each month Standard Bank will buy the shares on your behalf. This costs R25, or 5% of your R500 investment.
- If you want to become an active investor it’s worth attending Online Share Trading’s educational seminar to familiarise yourself with the markets, costs and terminology. It’s free and you can contact them on 0860 121 161 or email [email protected] for details and venues.
To open a trading account you can register with Standard Bank, submit your FICA documents and fund your trading account with US dollars, the most traded currency in the forex market.
- If you don’t think you’re ready to have a live account, and need to gain a bit of experience, Standard Bank offers a demo account.
- This will provide you with a no obligation 20-day free trial account funded by a simulated USD100 000.
Fortune favours the researcher. If you’re going to invest your hard-earned money, you need to do your homework. You can’t trust your intuition for two reasons:
- There is too much uncertainty when dealing with a company’s performance
- There are too many factors involved in deciding whether stock is a good buy.
You need to understand exactly how a company makes money, its strengths and weaknesses, where it’s expanding to next and the environment it’s operating in.
To get started check online trading platforms for broker consensus recommendations. These are typically a collation from brokerage and research houses. This will give you a strong indication which stock is good to buy. You shouldn’t rely on this information alone, but it’s a good starting point.
A sensible place to start is with some of SA’s top 20 companies. These are generally successful businesses that have a solid track record. You will also more than likely be familiar with them as they are household names.
Another reason to start with these businesses is that there is a large amount of information available on them, so you can find out which one you think is offering the best value for money. Another potential strategy is to buy shares in multiple sectors, so you have a diversified portfolio.
When should you consider investing in a large-to-medium sized company?
- Large-to-medium sized companies – the next 20 largest businesses in South Africa – can also be successful investments. These businesses are still growing and can offer more growth potential over time.
- While you save up additional funds, you can begin to add these types of businesses to your portfolio every few months.
When should you consider investing in a smaller company?
- When it comes to smaller companies, they tend to be the riskiest because they may still undergo growing pains. On the other hand, this can also be where the real money is made.
- For example, say you invest R5 000 in a smaller business at R1.80 a share, and that business experiences significant growth, bumping up the share price to R180, your investment could be worth nearly R520 000. But if the company has bumpy ride, you could also see the value of investment halved.
Over time, shares have outperformed other asset classes, but this also comes at a cost. The old adage 'high risk, high return' means that an investor who takes on the higher risk of investing in shares expects a higher return for doing so.
Here are a few of the risks of investing in shares:
- Share prices also go down. Researching the business can mitigate a portion of this risk
- Shares can be illiquid, which means that they can be challenging to trade. Avoid this by investing in more liquid shares
- The company doesn’t pay dividends. This could mean that the business is reinvesting in itself for future growth, but it also means you won’t receive income
- You could lose your entire investment if the business goes bankrupt
- Companies can disappoint the market by reporting lower-than-expected earnings. This could result in the share price falling or lagging behind competitors
- Mismanagement within the business, such as fraud or poor corporate governa