6 tips to trading the stockmarket in a pandemic
Billions of dollars has been wiped of global sharemarkets as the COVID-19 pandemic continues to cause market uncertainty.
Stock prices have dropped considerably, lulling investors and would-be stockmarket heroes into a false sense of security.
Of course, the first rule of investing is don’t overestimate your ability to profitably invest.
ASIC is concerned for retail investors
Last week, the Australian and Securities Investment Commission (ASIC) released a report highlighting its concerns about the trading activity of retail investors during COVID-19.
The report was unflattering to say the least.
Retail investors have flooded the market looking for the next big score. It’s not surprising some of the biggest stocks including the big four banks have fallen to new lows. As such, novice traders are expecting to nab a good stock at a bargain price.
However, we don’t know if further falls are to come: most analysts will tell you to wait until we understand just how far the market could fall, or if we have indeed hit bottom.
The problem with the a flood of retail investors into the market is it brings greater exposure to risk.
For instance trading activity in Contracts for Difference (CFDs) has increased significantly. A contract for difference (CFD) is a form of derivative trading that enables investors to speculate on the rising or falling prices of fast-moving global financial markets including shares, indices, commodities, currencies and treasuries.
It is highly volatile and retail investors who understand markets will take a cautious approach to CFD trading, particular in times of economic instability.
Between March 16-22 this year, retail investors net losses from trading CFDs totalled $234 million from 12 CFD providers.
ASIC reports that trading frequency has also increased, while the duration for holding securities has significantly decreased pointing to a concerning issue with day trading activity.
That’s bad news, because even professionals struggle to time the market in volatile periods.
So what novice investors do?
Tip 1: Don’t chase the quick buck.
It’s not worth it. Retail investors have traditionally performed poorly when chasing a quick profit and playing short-term games. Heavy losses are not worth putting your family in jeopardy during the current pandemic … or ever.
Tip 2: Seek professional advice
If you have ever followed a stock market tipping page, you’ll notice it carries a lot of risk cautions, notably advising investors to seek professional advice. There’s a reason for that: professionals are qualified to help you see what options are available. To help you understand your risk profile and what you can afford to lose. Jumping in blindly without professional advice is dangerous, only do it if you fully understand the risks and what you can afford to lose.
Tip 3: Don’t overestimate your knowledge.
According to analyst Wealth Within founder Dale Gillham, 50 per cent of adult Australians believe they are very knowledgeable or somewhat knowledgeable when it comes to investing in shares.
The ASIC report proves otherwise.
During this pandemic, investors have made investors have repeatedly made knee jerk reactions out of fear and, at times, greed.
Bottom line, don’t overestimate your level of knowledge.
Tip 4: Google is not an advisor
The University of Google is a dangerous place. Just like you shouldn’t seek medical advice, you shouldn’t seek direct trading advice. Use Google to find a financial advisor or a trusted source.
The problem with Google is it creates false confidence. You wouldn’t take a scalpel to your chest because Google directed you how to do it, so why ask Google how to trade. Misinformation is your enemy.
Tip 5: Take the long road
While short term trading can reap profits if you know what you are doing, the best thing you can do is take long positions in strong companies to mitigate risk and potentially watch your nest egg grow.
Tip 6: Beware the hot tip
If someone gives you a hot tip on a stock, follow the simple rules above. Do your own due diligence, seek professional advice, know your risk factor, decide whether it’s a long term investment and don’t get cocky.