Investment & Financial Articles
Title: How to Make Money in the Sharemarket
Author: Joseph Sgro
Article:
How to Make Money in the Sharemarket
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Isn't earning a good return on our money a very essential
consideration? Yes I think most would agree. We want to build
our retirement money-machine because we all know you need piles
of the stuff and if we are going to enjoy retirement then we
better have a GOOD PLAN!
CONSIDERATIONS
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Real Estate: You make your money when you buy!
Small Business: You make your money when you sell your
money-making system.
Shares: You make your money when you can!
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My favourite game is playing the sharemarket and I will admit to
you from the start it's not always money in your bank account -
why? Simply because it's a game where the one who who knows the
most makes the money.
If you want to join me then start your education now! Learn how,
do the training and master your emotions you you will do well.
LOOKING BACK
It wasn't till I lost my advisor that I really learned about
making money. Now I'm not saying sack your advisor - I would
never say that! You have to make your own decisions.
An advisor can tap into situations that you would not be aware
existed. You can also learn from them. Just be careful as to who
gives you advice and make your own decisions.
Don't trust anyone to make money for you. No one cares about
your money the way you do. Advisors in most cases are just sales
people who need to get clients so that they can pay their bills.
At the best of times you do not rate that highly in their
priorities.
If you lose or win, it's nothing to them - they hope they will
still get to keep their jobs. It is easy to understand - make
them a lot of money and they might let you know what is
happening to your account, but this depends on who is more
important than you today. We all want advice and we all ask the
opinions of others, but don't become dependent on someone
solving your problems - you are alone! Now live with it! The
sooner you take full responsibility the better.
The people who make excellent returns are those that see trading
as a business and realize that they will always be a pupil who
needs to keep learning, be self-motivated and resilient, because
losing at some stage is inevitable.
There are going to be more people that lose money than make
money. I have had strings of losses, where position after
position has had to be closed. Now you don't need that to happen
too many times to wipe out your capital. This is the reason for
keeping your positions small. You must decide how much time you
will be willing to invest to learn how to make your fortune and
keep it. The less time you're willing to devote to learning, the
less money you should put into the sharemarket.
The gambler will eventually give his winnings back to the house
because they do not have a plan and trading rules which help
them develop self-discipline. The most important quality to
develop if you seriously wish to be successful in the
sharemarket is self-discipline. Although this is easy to write
in words I assure you that developing personal discipline is
very hard and to carry out actions without involving emotion can
be next to impossible. We are often ruled by emotion and we hate
to admit we have made a loss - thus, often we won't do what we
should to rescue our remaining capital. This is how a little
loss becomes a big loss over time.
Master yourself - your emotions will help you lose money. The
more you think with your emotions and the more you make
decisions with your emotions, the more you will lose.
NO ONE CAN PREDICT WHAT WILL HAPPEN IN THE MARKET!
If anyone can predict with any accuracy it won't be you and if
you must predict what is going to happen, don't put any money on
your bet. Next, if your broker could predict what was going to
happen he/she would not be a broker - they would be living the
life of Riley. If the money is coming out of the market then for
god's sake take notice. This may be as close as you get to
insider trading.
The stockmarket is like a sport. Everyone wants to see the great
players and witness all the action, but not everyone is going to
win the game. It is up to you to learn how to play the game. You
need to learn the rules and learn the tactics and strategies to
help you score more goals.
There are many different plays you can make in the market, but
learning the less risky plays and those that reduce risk will
make you more money.
Less risky to some......using options to make money
Examples might include:
1. Writing puts when the market is going up instead of buying
the stock. If you're exercised then you can decide whether to
buy the stock or act earlier to prevent the exercise by closing
out your put position when the put price drops(buy the same put
series and close it out).
2. Writing calls over your shares when it looks like the stock
price is ready to fall.
3. Buy calls or puts depending on which way the market is going.
Up market might indicate buying a call to cature the upside. A
falling market may indicate buying a put to capture the rising
value created by people buying protection.
The first strategy many people will see as too risky, but it
really depends on your level of education in options, whether
you can handle the risk and how much spare cash you have to meet
your obligation if your puts are exercised. If the total cost of
exercise is $50 000 and you have the money then in the case you
do get exercised you will be able to buy the shares.
Get protection for your shares
Buy Puts Let's say you protect your position by buying a put,
then if the price drops you will cap your loss, or
alternatively, you could sell the put/s, which may result in a
profit and thus make up for any lost value in the share.
Covering your position may be an on-going requirement. There
will always be a price to pay - that's life!
Making money buying puts
Write Puts If you write puts then you'll be obliged to buy the
stock in the event you are exercised and so having sufficient
cash is essential. You can also buy another series to cap your
potential loss to the spread between the two series.
If you wrote $10.00 puts and bought $9.50 puts your loss would
be partly covered by having that cover if the price drifted
lower.
So we can make what looks risky, less risky, by knowing more
about what is possible and then choosing our exit strategy. If I
am exercised my contingency plan might be to write calls over my
new shares and if I preferred, I could go back to put writing,
by letting myself be exercised.
If I wanted to keep the shares then I would write calls that are
further out of the money. I can even buy calls in a different
series so that in the case the share price goes up I capture
some of the increase, or I can cancel the contract by buying
calls in the same series.
During May 2002 I used this same strategy with NCP. I wrote puts
at $12.50. I watched the share go down to $9.68. I let myself be
exercised and met my obligation by paying $12.50/share - risky?
You bet, because all the worst conditions for put writing came
together in June 2002, the month I wrote puts.
It fell to $8.44. NCP makes up 10% of the Australian All
Ordinary Index, so you could expect such an important stock will
get serious attention. However at the time big media companies
were not the flavour of the month - all the flavours had turned
sour!
Following the purchase of the stock I wrote covered calls. There
is nothing wrong with the strategy, but timing is your most
important variable - thus a contigency plan is required. Keep in
mind that 1 month in the market is a long time and 3 months is
an eternity. Things can change very quickly from panic to
ecstacy for no apparent reason. Someone always raises their hand
with an explanation to satisfy the crowd - wouldn't we be
disappointed if someone couldn't tell us. I think we'd probably
get very worried!
Writing calls is a good idea when you think the stock price will
fall. My contingency in the event I was exercised was to write
calls and make up the difference I had lost - I didn't intend
buying back the calls, as I felt there was little risk of losing
the stock because the $10.50 level would remain out of the
money.
The resulting action suggested that a better plan would have
been to buy/write regularly - buy the calls back sheep(cheap)
and write deer(expensive). Waiting first for the stock to peak
then writing the call.
I could have closed out my contract by purchasing puts in the
same series. I could have bought puts in another exercise price
series to cap my loss. I chose a different way and regretted my
choice. Holding the stock was not the easiest choice I could
have made and in fact it held me back from making a lot more
money.
Once I had the stock I had to protect it. If I then sold the
protection I could have found the stock slipping further in
value, so I kept the protection in place and missed the profit
as the stock moved back up. So even though I inially lost by
having been exercised I lost more by not being in a position to
be more flexible. A further complication was my stock was
purchased with a margin loan.
What should I have done?
I could have sold the protection , made a profit and then looked
at buying the same protection cheaper. I could have done this at
least 4 times in 4 months.
This brings us to the topic of increasing the flexibility of
our thinking.
If you make money only in one direction you will reduce your
trading results drastically. The market does not always go up!
Sometimes it goes down or moves sideways.
We all need to be on the right side of the market. Believe me
the alternative is no fun!
Happy Trading, Joseph Sgro
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Copyright(C) Joseph Sgro 2003 Further this discussion by
reading: "10 Simple Rules to Make Serious Money in the
Sharemarket and Keep it!"
http://www.tutorhelp.com.au/sharemarket.html Affiliates:
mailto:affiliates@tutorhelp.com.au Subscribe for more articles:
mailto:10simplerules@FreeAutobot.com
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About the author:
Joseph Sgro has spent a good slice of the last 20 years as an
educator and as a trader for the 16 years.
He writes of his experiences trading the stockmarket and shares
with others "HOW TO" via THE 10 Simple Rules Ezine: How to join
the top 5%.
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