Questions from a stock market beginner

[grah33]

say i bought CBA. i have to have a rescue plan. say it starts going down badly, unusually , and i have to exit. what % decrease would one typically exit? if another gfc occurs, i'm not going to stay in there. my impression is that many try to get out if things go really badly.



defensive stocks, as per the stockwatch website, like woolworths. they keep shareprice constant but produce a dividend, which is better then putting the converted money into the bank.

 

[Value Collector]

say i bought CBA. i have to have a rescue plan. say it starts going down badly, unusually , and i have to exit. what % decrease would one typically exit? if another gfc occurs, i'm not going to stay in there. my impression is that many try to get out if things go really badly.



defensive stocks, as per the stockwatch website, like woolworths. they keep shareprice constant but produce a dividend, which is better then putting the converted money into the bank.

Everyone has different strategies,

I would suggest taking the attitude of a business man, Learn how to find good businesses you can understand, learn how to work out how much the companies are worth, and buy their shares when the shares are trading significantly cheaper than what the company is worth.

Consider selling the shares when they have become significantly over valued, or you believe the long term outlook for the company has changed and the price no longer represents value.

Short term volatility doesn't really bother me, you can take away most of the risk of long term loss by not over paying to start with.

If you bought CBA 10years ago, and held right through the GFC and reinvested all the dividends into the dividend reinvestment plan, you would be sitting pretty now. The GFC would have actually helped you, because the dividends paid during that time would have bought you more shares because the price was cheaper.

i assume one can sell their shares if they are going down hill (say a bear market occurs) and then later on re-buy them if they increase again in share-price and things are looking good again ?

you want to buy low sell high, not sell low buy high.

 

[grah33]

hi
just thought i'd repost some of my questions, as i'm still sorting out how to do it on a practical level. read tonnes of stuff but not enough practical info yet.


1) i take it if another GFC happened again overnight, a person can have some kind of automatic exit sale order (eg. “sell shares when price drops to X”), which could protect them from disaster. correct? i'm thinking my shares would sell automatically and i'd get the money going to my bank account safely. no drama.

2) i assume one can sell their shares if they are going down hill (say a bear market occurs) and then later on re-buy them if they increase again in share-price and things are looking good again ?


3) i've read lots of info, but not an example for me. what can i do with eg 20k? i want to avoid great risk and build it up gradually over many years . what money percentage would i put into income/blue chip stocks? and what for the remaining percentage into growth stocks? Is there another group of shares I need too?

4) to be diversified and protected enough, how many companies do i need for my 20k investment?

5) should i incorporate a fund, and how much of that 20k? it's an easy way to diversify. and will i be losing lots of money to the fund manager so that it's not worth it?


6) what's a good exit percentage for blue chips? i mean, for eg. cba or other blue-chips, if they go down, how much down until i sell them off to avoid disaster? as their current stationary high shareprice is never guaranteed. i would probably just use the money and buy other blue chip shares. I'm thinking I would have automatic sell orders going so they sell when the price goes down a certain amount. Those shares are meant to be stable for me, so i'll get rid of them if they go down too much.

thanks

 

[Habakkuk]

just thought i'd repost some of my questions, as i'm still sorting out how to do it on a practical level. read tonnes of stuff but not enough practical info yet.

Could you give us an indication of what it is that you have read tonnes of? A short list will do.

 

[DeepState]

hi
just thought i'd repost some of my questions, as i'm still sorting out how to do it on a practical level. read tonnes of stuff but not enough practical info yet.


1) i take it if another GFC happened again overnight, a person can have some kind of automatic exit sale order (eg. “sell shares when price drops to X”), which could protect them from disaster. correct? i'm thinking my shares would sell automatically and i'd get the money going to my bank account safely. no drama.

2) i assume one can sell their shares if they are going down hill (say a bear market occurs) and then later on re-buy them if they increase again in share-price and things are looking good again ?


3) i've read lots of info, but not an example for me. what can i do with eg 20k? i want to avoid great risk and build it up gradually over many years . what money percentage would i put into income/blue chip stocks? and what for the remaining percentage into growth stocks? Is there another group of shares I need too?

4) to be diversified and protected enough, how many companies do i need for my 20k investment?

5) should i incorporate a fund, and how much of that 20k? it's an easy way to diversify. and will i be losing lots of money to the fund manager so that it's not worth it?


6) what's a good exit percentage for blue chips? i mean, for eg. cba or other blue-chips, if they go down, how much down until i sell them off to avoid disaster? as their current stationary high shareprice is never guaranteed. i would probably just use the money and buy other blue chip shares. I'm thinking I would have automatic sell orders going so they sell when the price goes down a certain amount. Those shares are meant to be stable for me, so i'll get rid of them if they go down too much.

thanks

1. You will not be protected if there is an overnight gap (assuming you are not otherwise using derivatives). If it happens during the trading day, you may still experience gap risk. In general, having stops regularly managed will help limit downside risk. However, do not think for a moment that adding stops all over the place actually contributes to making money which is what this is ultimately about in the longer term.


2. What matters is finding stocks that will be going up. You assume that you actually know that stocks will continue to go down just because they have. This assumption is very questionable. In effect you will also be selling low and buying high. Not the smartest thing if you are thinking for the long term.

Do not invest what you cannot afford to lose. That is the risk management practice that should not be sacrificed.


3. What you want is a portfolio that makes sense. Individual components of the type you mention are less relevant than thinking about the whole thing is. You want good stocks. A good stock is one which goes up (subject to risk taken). These stocks do not care what you classify them as ahead of time.


4. Depends on purpose. If you just want to get an economically representative exposure to the Australian equity market, as few as 12 will do it. But it depends on what you are buying. A portfolio of 12 mining explorers is hardly adequate for most people. The weights also matter. The detail matters when responding to your question in an underlying sense.


5. You can buy an index ETF whose management fees are very low. You would be surprised as to how hard it will be to beat this over the very long term. You will encounter a lot of noise explaining why you could do better etc. The great majority will not deliver. Check the sources.


6. It depends.

 

[Julia]

say i bought CBA. i have to have a rescue plan. say it starts going down badly, unusually , and i have to exit. what % decrease would one typically exit? if another gfc occurs, i'm not going to stay in there. my impression is that many try to get out if things go really badly.

RY has addressed this issue.

defensive stocks, as per the stockwatch website, like woolworths. they keep shareprice constant but produce a dividend, which is better then putting the converted money into the bank.

It might help your understanding to look at a few stock charts. If you don't have access to a charting program I think the ASX probably has some basic charts where you can look at what has actually happened with share prices over various periods. www.asx.com.au
http://hfgapps.hubb.com/asxtools/Charts.aspx


On WOW, for example, it wasn't immune during the GFC. Fell from around $35 to under $25. Now around $33.
Div yield around 4% fully franked.

On CBA which you raise as an example, it was around $60 pre GFC, went down to less than half that. But now it's $81! Dividend around 5%, fully franked.

Everyone has different strategies,

I would suggest taking the attitude of a business man, Learn how to find good businesses you can understand, learn how to work out how much the companies are worth, and buy their shares when the shares are trading significantly cheaper than what the company is worth.

Consider selling the shares when they have become significantly over valued, or you believe the long term outlook for the company has changed and the price no longer represents value.

Short term volatility doesn't really bother me, you can take away most of the risk of long term loss by not over paying to start with.

If you bought CBA 10years ago, and held right through the GFC and reinvested all the dividends into the dividend reinvestment plan, you would be sitting pretty now. The GFC would have actually helped you, because the dividends paid during that time would have bought you more shares because the price was cheaper.

Yes, this is a popular approach with some. I guess you have to like analysing businesses. I don't. A focus on price which reflects market sentiment, will largely preserve your capital and mean you're not holding onto a dog which is going down.

(As an example of this, have a look at chart of MND, once an absolute market darling, tripling in price from 2005 to 2008, recovering post GFC to around $30, but now in strong downtrend, today $10.64. Because of the fall in price, the dividend yield is now about 11%. Does that make it worth the capital risk? Absolutely not for me, but obviously there's an attraction there for some people or they wouldn't still be holding on to it.)

Best advice I ever heard was "let your profits run and keep your losses small". So I'd be opposed to the philosophy of selling because "it's overvalued". If the price is continuing to rise, the market is putting that value on it, so why sell when there is still money to be made.

However, I get the philosophy of the value investors. Am not trying to be argumentative or inflammatory, just offering a different approach.

If, grah, as you suggested earlier, you exited soon after the GFC occurred, (unlikely to sell at exactly the top, but giving back just a small amount of profit), sat out the GFC in cash (good interest rates available at the time because of the credit squeeze), then buy back when it trended up again you could buy about twice as many shares as you sold, with consequent increased income from dividends and franking.

I'd guess that would be more profitable than just the addition of the dividends being reinvested as VC suggests, but haven't done the sums.

Then, everything RY said.

 

[luutzu]

RY has addressed this issue.


It might help your understanding to look at a few stock charts. If you don't have access to a charting program I think the ASX probably has some basic charts where you can look at what has actually happened with share prices over various periods. www.asx.com.au
http://hfgapps.hubb.com/asxtools/Charts.aspx


On WOW, for example, it wasn't immune during the GFC. Fell from around $35 to under $25. Now around $33.
Div yield around 4% fully franked.

On CBA which you raise as an example, it was around $60 pre GFC, went down to less than half that. But now it's $81! Dividend around 5%, fully franked.


Yes, this is a popular approach with some. I guess you have to like analysing businesses. I don't. A focus on price which reflects market sentiment, will largely preserve your capital and mean you're not holding onto a dog which is going down.

(As an example of this, have a look at chart of MND, once an absolute market darling, tripling in price from 2005 to 2008, recovering post GFC to around $30, but now in strong downtrend, today $10.64. Because of the fall in price, the dividend yield is now about 11%. Does that make it worth the capital risk? Absolutely not for me, but obviously there's an attraction there for some people or they wouldn't still be holding on to it.)

Best advice I ever heard was "let your profits run and keep your losses small". So I'd be opposed to the philosophy of selling because "it's overvalued". If the price is continuing to rise, the market is putting that value on it, so why sell when there is still money to be made.

However, I get the philosophy of the value investors. Am not trying to be argumentative or inflammatory, just offering a different approach.

If, grah, as you suggested earlier, you exited soon after the GFC occurred, (unlikely to sell at exactly the top, but giving back just a small amount of profit), sat out the GFC in cash (good interest rates available at the time because of the credit squeeze), then buy back when it trended up again you could buy about twice as many shares as you sold, with consequent increased income from dividends and franking.

I'd guess that would be more profitable than just the addition of the dividends being reinvested as VC suggests, but haven't done the sums.

Then, everything RY said.

How will you then buy businesses if the stock market closed down; or if the business does not list on an exchange?

I mean I agree with you that there are other ways, and your approach might be just as or more sensible than other approaches... but it seems to me that if an approach to buying a business on an exchange cannot be applied to buying the same or similar business but one not listed... that approach might not be correct.

Don't get me wrong, it might work fine, it might even be more profitable... but might not be the right way, the right scale, to use to measure businesses to buy.

 

[luutzu]

hi
just thought i'd repost some of my questions, as i'm still sorting out how to do it on a practical level. read tonnes of stuff but not enough practical info yet.


1) i take it if another GFC happened again overnight, a person can have some kind of automatic exit sale order (eg. “sell shares when price drops to X”), which could protect them from disaster. correct? i'm thinking my shares would sell automatically and i'd get the money going to my bank account safely. no drama.

2) i assume one can sell their shares if they are going down hill (say a bear market occurs) and then later on re-buy them if they increase again in share-price and things are looking good again ?


3) i've read lots of info, but not an example for me. what can i do with eg 20k? i want to avoid great risk and build it up gradually over many years . what money percentage would i put into income/blue chip stocks? and what for the remaining percentage into growth stocks? Is there another group of shares I need too?

4) to be diversified and protected enough, how many companies do i need for my 20k investment?

5) should i incorporate a fund, and how much of that 20k? it's an easy way to diversify. and will i be losing lots of money to the fund manager so that it's not worth it?


6) what's a good exit percentage for blue chips? i mean, for eg. cba or other blue-chips, if they go down, how much down until i sell them off to avoid disaster? as their current stationary high shareprice is never guaranteed. i would probably just use the money and buy other blue chip shares. I'm thinking I would have automatic sell orders going so they sell when the price goes down a certain amount. Those shares are meant to be stable for me, so i'll get rid of them if they go down too much.

thanks

1. Private brokers would offer that, don't think cheap online brokers like commsec set that - unless you make that order and redo it every month.

2. That assumes you can pick when it's going to go down further; when it's up and will go up further.
This approach never worked for me. Once I sold something, I rarely buy them back... either looked elsewhere already or too proud to pay higher than what I sold them at.

3-4. At $20K, 12 stocks is too much diversification... maybe 4 or 5 max. Spread them across different sector and best to stick to big corp. say ones with sales around $2 billion... that's not to say they won't go down the tube, but less chance of total flush.

5. You would lose a lot more money if you don't know what you're doing. Best to get educated first before trying it out yourself. Maybe pick a couple of big blue chips to get interested... in mean time either buy an index fund or put in saving account.

It's best to not lose money; don't think that by not doing anything you're losing money because it's not earning... that is true, but it is also true that you might lose both principal and opportunity if you just pluck it out there.

6. I've exited a few investment with gains of 30 to 50% in less than a year, and still lose a lot of money on those. i.e. I shouldn't have exited.

You got to really understand the business and what it's worth, else you could lose out when it goes down as well as when it goes up. Screwed both ways.

 

[Julia]

How will you then buy businesses if the stock market closed down; or if the business does not list on an exchange?

I mean I agree with you that there are other ways, and your approach might be just as or more sensible than other approaches... but it seems to me that if an approach to buying a business on an exchange cannot be applied to buying the same or similar business but one not listed... that approach might not be correct.

Don't get me wrong, it might work fine, it might even be more profitable... but might not be the right way, the right scale, to use to measure businesses to buy.

If the above is in response to my post, I have no idea what you're talking about. Stock market closing down????
Business not listed???? More than 2000 stocks on the ASX: plenty to choose from, and my selection would be from a carefully selected few.

How about a few other people responding to the OP here? He asks for clarification on some basic points.
Maybe some of the folk who usually only post on the political threads might like to share their market approach?

 

[luutzu]

If the above is in response to my post, I have no idea what you're talking about. Stock market closing down????
Business not listed???? More than 2000 stocks on the ASX: plenty to choose from, and my selection would be from a carefully selected few.

How about a few other people responding to the OP here? He asks for clarification on some basic points.
Maybe some of the folk who usually only post on the political threads might like to share their market approach?

Was saying that if your approach is to look at market movement, the stock share prices dropping or going up etc.... if you based your approach on that, how could you use that approach if there is no stock market? Or how to use that to buy private businesses not listed?

But if the answer is you won't buy private businesses, the market exists and you will only buy it there. then OK.

 

[Julia]

The whole thread, for that matter, this whole forum, is about the stock market so why you'd make a comment based on its non-existence is somewhat puzzling.

 

[pixel]

How about a few other people responding to the OP here? He asks for clarification on some basic points.
Maybe some of the folk who usually only post on the political threads might like to share their market approach?

Great suggestion, Julia;
this is after all the Aussie Stock Forum and not some pseudo-philosophical debating circle.

FWIW, grah33:
Several brokers - even small onliners - offer "Stop Loss" or "Conditional" orders. While nobody can give an absolute guarantee that such an order will be executed, the chances of an extremely nasty surprise can be greatly minimised by selecting suitable stocks and keeping a close eye on each stock's life cycle.

In regard of conditional orders, I will however urge caution, Personally, I never set an automatic order where I leave it up to a broker's operator or computer system to execute a sell order. At your current state of study, it would probably take too much time to explain the details: searching this Forum for "stop raids" might give a clue. Instead, I watch how my stocks perform, set alerts for announcements and trading ranges, and make informed decisions whether to sell, hold, or buy more at certain predetermined price points. But unlike luutzu, I'd urge you not to review your price points once a month, but check performance every day.

Systems that offer reliable alerts do cost money, of which you don't have all that much. But if you follow luutzu's suggestion and limit yourself to about 5 stocks, you should be able to check all the necessary information several times a day by looking at the current trading range with e.g. incrediblecharts, and market announcements on the ASX website http://www.asx.com.au/asx/statistics/announcements.do .

Depending on your nerves, you could then hold on to your chosen stocks for as long as they meet your criteria, even if they were dropping due to the Market expectation of impending doom - be it sectional or global.

If your nerves are not quite up to it, if you were losing sleep over the risk of a 10% or 20% paper loss, you might indeed be better off with a term deposit. After all, the prime maxim of the Share Market is -
Only buy shares with money you can afford to lose!

 

[grah33]

qs on "day trading"

i've noticed some people just try to trade on the go as well as long term investing in shares. Just wondering, what does the process involve for finding stock to buy and hold and soon after trade (day trading )? how does one go about it? i'm at home (for various reasons can't work) so maybe this might suit me. maybe i can make some smaller gains from time to time.


thanks for answering my other questions. i read and reflected on those posts. they are helpful to me. also, someone asked which source i've been learning from. i learned alot from the comm bank learning site, stockwatch.com.au articles, stockwatch shares game, and the asx site. i should have done the asx course first. it's comprehensive and covers all the things a person needs to know, or almost all things , in one place. that's what we beginners need in a resource, rather than articles which focus on certain aspects only.

 

[Habakkuk]

It's probably a bit presumptuous of me to offer advice, maybe even illegal but ASIC will have to find me first.
You're reading lots of stuff and that's a good thing, but think about who wrote it, why it was written and when.
I could elaborate, but you can figure it out for yourself.
Secondly, it is useful (in my opinion) to think of all investing and trading as a zero-sum game, even if a lot of people will disagree and even if it is not absolutely true. It just helps to think lika that.
Therefore (in my opinion), whenever I make a profit, somebody has to lose.
Now who do you think that will be in my case and yours?
What is it that I know that the loser doesn't?
What if he has read more books or better ones?
Again, just think about this for yourself.

What I'm cautiously suggesting to you is that you should perhaps not jump into day-trading just yet.
I don't think you can read a book about it or watch a guy on youtube tell you what to do and be successful.

That's all for the moment - I want to watch Survivor on channel 99

 

[Julia]

Secondly, it is useful (in my opinion) to think of all investing and trading as a zero-sum game, even if a lot of people will disagree and even if it is not absolutely true. It just helps to think lika that.
Therefore (in my opinion), whenever I make a profit, somebody has to lose.

I'm not sure why it would be helpful to take such a view? How does it help you to think in those terms?

Why would you necessarily consider that for you to make a profit someone else has to lose?

That someone might well have bought way below the price at which they are selling.
They might have reached their % profit target and be selling at pre-determined price.
With cash rates so low, the money might be parked in shares because of potential capital gain on top of far greater yield than offered for cash at bank.
Perhaps saving for house deposit and time is right to make house purchase.

A thousand different reasons.

Once you start introducing emotional rationales into buying and selling, you're losing sight of the basic reason for investing/trading, ie to make a profit.

Don't worry about who might be on the other end of your trade. It's irrelevant. Someone has put up their holding for sale: if you can acquire it for the price you determine, then that's all there is to it.
Don't over-complicate things.

 

[Habakkuk]

I'm not sure why it would be helpful to take such a view? How does it help you to think in those terms?

Because I know that I'm up against some very smart people including some on this forum. Trading and investing is a very competitive business. Many people believe they can just subscribe to a newsletter or do a course or (dare I say it?) study a little T/A or F/A and make a lot of money. Also, please note that I said "in my opinion" - most people will disagree with me, I know that.

Why would you necessarily consider that for you to make a profit someone else has to lose?

Don't you believe trading (and investing) is a zero-sum game, in reality a negative-sum game after brokerage and spread?

That someone might well have bought way below the price at which they are selling.
They might have reached their % profit target and be selling at pre-determined price.
With cash rates so low, the money might be parked in shares because of potential capital gain on top of far greater yield than offered for cash at bank.
Perhaps saving for house deposit and time is right to make house purchase.

A thousand different reasons.

You make a good point. No argument from me. But it goes with my other belief above. If I believe that the buyers and sellers before and after me all make a profit and I do too, it's starting to look easy. And it's definitely not. But as you know, I'm not speaking from experience.

I was also trying to caution grah33 about day-trading, that IS a negative- or zero-sum game

Once you start introducing emotional rationales into buying and selling, you're losing sight of the basic reason for investing/trading, ie to make a profit.

Nothing emotional about it. Game theory. Maybe a little logic.

Don't worry about who might be on the other end of your trade. It's irrelevant. Someone has put up their holding for sale: if you can acquire it for the price you determine, then that's all there is to it.
Don't over-complicate things.

... and here you go again, lecturing and giving orders.

 

[tech/a]

Cant be bothered making a long winded reply---but perhaps this "For Dummies" maybe of interest to you.

http://www.dummies.com/how-to/content/day-traders-work-in-a-zerosum-environment.html

Don't worry about who might be on the other end of your trade. It's irrelevant. Someone has put up their holding for sale: if you can acquire it for the price you determine, then that's all there is to it.
Don't over-complicate things.

An experienced comment and I definitely agree with the highlighted section. That's what your doing and it is Irrelevant.

... and here you go again, lecturing and giving orders.

Oh I see you want to be with the "Popular kids"

You're really Dale Carnegie!-----Right!

 

[McLovin]

Don't you believe trading (and investing) is a zero-sum game, in reality a negative-sum game after brokerage and spread?

Investing is not a zero sum game and depending what you're trading neither is trading. It's not about what one believes it's about what is fact.

 

[Julia]

Also, please note that I said "in my opinion" - most people will disagree with me, I know that.

Well, at least you got that bit right.

 

[grah33]

and if anyone knows some cool beginner sources that have all the stuff one needs to know to get up and running with day trading, let me know.

my original question, about day trading, was: Just wondering, what does the process involve for finding stock to buy and hold and soon after trade (day trading )? how does one go about it? i'm at home (for various reasons can't work) so maybe this might suit me.

(thanks for the dummies day trading link. don't know if that's a comprehensive source for ozzie asx day traders, but will investigate)