You don’t have to spend a fortune to become a trader, but you do need to spend time.
When asked about his biggest financial mistake, Money Makeover candidate Dipolelo admitted that taking out a loan to buy software that claimed to teach him to invest on the JSE, was a really big mistake.
“I was misled into believing that it was best to finance through a loan. The guy who was working for the organisation told me it would be recovered within a short space of time and that he would always be there for me.”
As Dipolelo soon discovered, it’s a lot harder to make money trading than the marketing brochures suggest, and the promised ongoing support never materialised. Unfortunately there are many such companies promising people the “secrets” to trading and becoming rich overnight, when in reality it is only the companies that are making any money, by selling expensive software and training courses. The companies also require you to use their trading platform which is more expensive than using a South African based stockbroker.
These practices have led to the JSE issuing a warning. Mpho Ledwaba, head of marketing at the JSE, explains that no stock-monitoring or share-trading software is required to invest or trade on the JSE and the JSE certainly does not endorse or authorise any such software.
All you need to invest on the JSE is an account with a stockbroker. Setting up such an account with a broker is usually free and there is only a monthly administration fee paid to the broker of around R20–R90, depending on the level of service provided. You only pay a brokerage fee when you buy or sell.
“It takes time, effort, skill and knowledge to make a profit on the stock market. If you want to manage your own portfolio successfully, you will need to invest time and study the market dynamics and products on offer,” says Ledwaba
Market expert and trader Simon Brown, who runs JustOneLap.com, a website that educates people on investing and trading, says companies that promise to turn you into a trader overnight are just selling hope and promise.
“There is a lot more to becoming a successful trader than a piece of software,” says Brown who adds that it took him ten years as a trader before he actually made money. Brown says in the first five years he lost so much money that it took another five years of trading and experience to recoup those losses and be in the same financial position he would have been if he had just invested it in an index-tracking fund.
“There is no secret to getting wealthy. We know how, but it takes time. These companies are trying to pretend that it can be done quickly.”
Brown believes that unless you are able to dedicate a large portion of your time to trading and are prepared to take some significant financial risks, a better investment strategy would be to invest in a fund or buy an exchange traded fund (ETF) that tracks the average performance of the JSE.
“Young people especially believe they are young enough to handle the risk of losing R20 000, but when you consider that the R20 000 invested for 20 years would have given them R200 000, then the loss is actually R200 000,” explains Brown.
From his own experience as a trader, Brown says no software package or technical analysis will prepare you for the emotional challenge of trading. “We have a bad emotional response to money. We are driven by fear and greed and this leads us to make mistakes,” says Brown who admits there are times even now, after trading for 20 years, that he still makes mistakes, despite the fact that he watches the market on a full-time basis.
The truth is that it takes time to build wealth. Even investment guru Warren Buffett, the wealthiest man in the world, made most of his money after 40 years of investing, benefiting from compound growth.
Cost-effective trading strategies
If you do want to become a trader, technical analysis programs can be useful, but you don’t have to spend a fortune on buying a package and training, and you definitely do not want to take out a loan to pay for it.
Brown recommends technical analysis software Amibroker, which can be bought for $350 (around R5 000). There are many web-based tutorials which will help you understand the package, as well as the ins and outs of technical trading, including JustOneLap.com which provides free education on how to start trading and investing on the JSE. Most stockbrokers, including online brokers, also provide clients with education around technical trading and some offer simulated trading platforms that allow you to trade with virtual money before committing actual hard cash.
Just remember this is not a get-rich-quick solution. It is the start of an investment journey.
The difference between investing and trading
A person who buys shares on the stock market can have two different strategies: either to invest or to trade.
An investor would typically buy shares on the JSE and hold on to them in order to build wealth slowly over time. The investment would increase in value as the company share price increases due to higher earnings and profits. Investment billionaire Warren Buffett would be an example of a successful investor.
A trader would purchase a share or an index hoping it would increase in value relatively rapidly (due to a specific event), and would then sell it once the price had increased sufficiently. This carries higher risk as it is based on expectations of short-term events that may not materialise or that affect the market in unexpected ways.