You have opened your first
PSG Wealth share trading account but as a novice investor/trader you find yourself at a loss as to what to do next. This tutorial document is compiled especially for you! It will provide you with an education plan that if you implement will provide you with the know-how on how to select, purchase and manage your own share portfolio and begin your journey of wealth creation.
To simplify this journey we have designed a few simple processes or steps to choosing your first shares.
To begin investing on the share market, ask yourself what you hope to gain by it or what is your main financial objective?
Hopefully you answered that you would like to make money!
Investor or trader?
In the share market, your main objective should be to maximise wealth! So begin with the end in mind and then work backwards. How do you maximise wealth on the share market? On the one hand you maximise wealth by maximising investment returns, while on the other hand you maximise wealth by minimising investment risk.
In determining whether you are a trader or an investor (or both), you will need to ask yourself some questions: Circle the answer which seems to apply mostly to you.
- What are your financial objectives?
- To create a second income or replace an existing income.
- To achieve financial freedom.
- To have a happy retirement
- How much starting capital?
- Less than R 50 000
- Between R 50 000 < R 1 000 000
- More than R 1 000 000
- How much time do you have on a daily basis to study and research the market?
- Less than 30 minutes
- Between 30 - 60 minutes
- More than 60 minutes per day
- What is your level of knowledge and experience?
- What is your level of risk?
Based on this assessment you can gauge what type(s) of PSG Securities Ltd wealth options may best suite your investment profile:
If you are more conservative and saving for retirement, with little time for self-education?
Then the above offerings will suite your wealth needs best as all of these options will provide you with low-risk moderate returns.
A greater amount of time is needed at the beginning when choosing which types of Unit Trusts, ETFs or shares best suite your needs but thereafter very little time is required in managing these investments. However, all of these options will deliver the best returns over the longer-term (e.g. 5 to 10 year horizon).
If you are moderate in your risk-preference and have at least 30 minutes to spend on self-education daily?
These options will allow you to create risk diversification as well as allow you try your hand at hedging vehicles allowing you to benefit from maximised returns with less capital. However, due to the higher risks associated with derivative trading we only recommend that clients who can spend between 30 – 60 minutes educating themselves daily on the latest market developments and researching share opportunities will benefit from trading SSFs or CFDs.
If you enjoy the thrill of high-risk high-returns but are prepared to put in the time to actively manage your portfolio?
- Equity trading
- SSF trading
- CFD trading
- Offshore investing
If you are willing to spend a minimum of 30 - 60 minutes a day then derivative trading is an exciting yet rewarding trading vehicle that will allow you to benefit from high-returns cost-effectively and requires minimum capital investment. Yet as in all things in life with high-return comes high-risk and this is equally true when applied to SSF & CFD investments. Alternatively, if you have more than R 100 000 to invest it may be worth your while to consider creating portfolio diversification by investing in global markets. This will allow you to benefit from investing in a number of blue-chip shares listed on International Exchanges.
Investment tip: If you have more than R 1 million to invest?
Then it may be worthwhile to consider having a personal adviser assist you in managing your portfolio. Please click here to find an accredited adviser near you.
The five steps explained
Now that you have an idea of what type(s) of wealth products may best suit your needs you need to know a little more about selecting the 'right' shares or investment options.
Before you can make money on the share market, you will need a portfolio of good, quality shares that offer great potential. Your goal is to create a balanced portfolio, using portfolio management techniques that will help you maximise returns (i.e. portfolio strategies such as buy & hold, swing trading or jobbing), as well as to minimise risk (i.e. portfolio management to avoid losing money such as diversification, structure and stop loss).
Trading tip: Remember, that it is not so important to make capital gains as it is to avoid capital losses!!
But before you can have a balanced share portfolio you will need to gain more knowledge about share analysis techniques. There are two schools of thought; the one being fundamental analysis and the other technical analysis. Combine the two together, and you have what can be called rational analysis. The more informed you are about a certain industry, sector and share, the better your success on the share market is!
And before you can do any share analysis, you will need to create a watch list of interesting looking shares. It is not so much the amount of capital you have to invest on the share market that is important, but more importantly, how much time you have available to invest in understanding the share market. But it is also about being 'wise with your time' and about conducting the right type of research and learning to be selective as it is impossible to follow the events of every single listed share. Otherwise you will feel overwhelmed with information and go crazy!
To create a watch list, you will need to go through a "prospecting" phase. As you gain more knowledge and experience on the share market, you will start refining this prospecting process and adapt it to your risk profile, your available time and your investment strategy that will help you to achieve your financial goals.
To simply the above explanations further, there are essentially five steps to choosing your first shares and they are as follows:
- Step 1: Narrow down the choice,
- Step 2: Gather fundamental information,
- Step 3: Get your timing right, and
- Step 4: Build a balanced portfolio.
- Step 5: Placing the trade!
So the whole process starts off with the prospecting process to create a watch list, from which you will do further share analysis to create a balanced portfolio that will maximise returns and minimise risk, so that you can make money or maximise wealth!
Steps required in the investing process
These steps below will form the basis for any future decisions that you may make.
Before starting this tutorial, we recommend that you set aside an hour a day for the next week to complete each of the steps below. This will also ensure that you have enough time to read through the relevant course material and answer the self-test sections before moving onto the next section.
We guarantee that if you dedicate time to completing this tutorial you will never look back. This will provide you with the essential 'building block' of investor knowledge allowing you to create a strong foundation for any future investing decisions you may make!
Let us begin!
Step one: Narrow down the choice
What does "prospecting" mean?
As a novice investor, you are faced at first with what appears to be an overwhelming array of choices when you look at the share price page in your daily business newspaper. There are over 400 shares listed on the JSE, in what we shall call the
"Universe of shares".
Your first objective is to
create your own watch list. You do this by narrowing your choice down to the top 25% of opportunities (i.e. roughly 25 shares) on the share market by using the process of "prospecting".
Note: PSG Securities Ltd allows you to create five (5) personal watch lists on the trading platform. It is suggested that you name the watch lists either by strategy (i.e. Short term speculative, medium term swing trading and long term buy and hold) or by industry (Resources and mining, Financial and Industrial).
How to create a watch list
Prospecting for shares
We have stolen the idea of 'prospecting' for shares from the mining industry when we use to pan for gold in the river beds. You had to process a lot of gravel to find small specks of gold. Similarly, your goal is to find those companies that are "gold nuggets" and avoid those companies which are called "dogs".
To create your own watch list, start the prospecting process by
looking for shares that offer good potential (i.e. gold nuggets). Remember, that at this stage you are not doing any analysis on the companies and therefore suggest that you make an 'Initial or preliminary watch list' on paper of interesting-looking shares.
There are four methods that you can start using to help you find interesting-looking shares, namely:
- The top-down method;
- Using the financial journalism method;
- The technical analysis method; and
- The fundamental analysis method
Prospecting using the top-down method
Another way of looking at the Top-Down method is called the "General to specific method" or "Funnel approach". There is a lot of information going into the top of the funnel, but we apply certain filter criteria so that only a little bit of information comes out the bottom of the funnel.
We start by looking at the "big picture, "and more specifically what is happening on the International Markets. At this stage, all you want to do is look at the long-term trends in all these markets. Is the long-term trend moving up or down?
Researching market trends
At this stage, it is suggested that you use a website such as investing.com to see what the trends are.
Examples of how to understand and research market trends are discussed below:
The US Markets - Start off by looking at the biggest economy in world, which is the American economy. When we talk about the American economy and the US Markets, we talk about Wall Street and the New York Stock Exchange (NYSE). This is the biggest stock exchange in the world, and has thousands of shares listed upon it. The most important group of shares that you want to follow is called the Dow Jones Industrial average (DJ Industrial). This is the top 30 companies in America, which include MacDonald, General Electric and Boeing. A broader cross-section of the US economy would be the Standard & Poor's 500 Index (SP 500).
The US economy is the gearbox of the global economy. If things are going well, it means that there is economic growth and jobs are being created. People feel more secure as they have more disposable income and therefore feel more prosperous and they start spending. This has a knock-on effect within the economy and eventually US companies have to expand to meet the demand and even start importing from overseas!
The Asian Markets - The second biggest economy in the world in Japan. The most important Japanese index to watch is called the Nikkei Index. They have many problems with their financial markets, one being that their share market has been in a downward trend (i.e. bearish trend) for more than ten years. The economy relies heavily on exported goods, especially computers and motor vehicles. China is on the heels of Japan and fast becoming the second biggest economy. One of the most important markets to look at is the Hang Seng Index in Hong Kong. China is important to South Africa because of their demand for our resources.
The European Markets - The fourth biggest market in the world is the European Union and within that the German market, which is called the DAX Index, while the French market is called the CAC 40 index. The most important European market for you to follow is the UK market, especially the London Stock Exchange (LSE) and the Financial Times 100 (FTSE 100 Index). Many South African shares, such as SAB Miller, Old Mutual, Anglo American and Sasol, are dual-listed (i.e. they are listed on the JSE and the LSE). More importantly, the UK markets are one of our bigger trading partners. If the British economy is doing well, more South African companies can export to them!
Researching economic indicators
The next step is to formulate an opinion on what is happening within those different markets as regards their
economic indicators. Here we start looking at the effects of a higher oil price (i.e. Brent crude oil) on inflation. What is the level of inflation in all those different markets? What is the current trend - up or down? Most western economies use interest rates as a mechanism to control the level of inflation. What is the current trend with interest rates - up or down?
The next step is to look at the
relationship between all the major currencies. What is happening with the US Dollar against the Japanese Yen or the US Dollar against the Euro? Is the US Dollar becoming stronger or weaker? What are the implications or a stronger or weaker US Dollar? What is happening with the Rand against the US Dollar or against the Euro? What are the implications or a stronger or weaker Rand?
Precious metals, is the next step in your top-down method, and here you want to look at what is happening with the gold price, as well as the platinum price? Is there an opportunity there?
Researching the South African market
Taking all of the above into consideration, you need to decide how do these factors affect or impact on the local South African market?
First of all, look at the trend on the JSE All Share Index. What is the current trend on this market? Is it moving up or down? If you think that inflation world-wide is under control and that interest rates will either stay at current levels or even move lower, then what industries would benefit from a lower interest rate environment?
Alternatively, you see that the gold price is starting to move higher and that the Rand is weakening against the US Dollar; you may consider looking at the mining and resource industries. Divide the South African economy into the three broad industries, namely: the mining industry, the general industry and the financial industry.
If you anticipate a lower interest rate environment, what specific sectors would benefit from that? You may consider the banking sector, as the banks would be borrowing more money as people take advantage of lower finance charges. You may also consider looking at the consumer sector (i.e. retailers, etc.). If you anticipate that the gold price is looking favourable, then you would zoom in on the gold mining sector, for example.
Within the banking sector, you would like at specific shares. For example, banking shares such as Standard Bank or Firstbank, while in the retailing sector you would look at Shoprite, PicknPay and Clicks. The same would apply for the gold mining sector, where you would look at Anglogold, Harmony and GFields for example.
The final step is to see if these initial shares would meet your criteria in the share selection check list that you would use as a comparison benchmark for shares that you think would offer potential. In other words, this is your fundamental and technical reasons why.
The Top-down method for finding interesting-looking shares is a very useful method as it is a reliable and safe method. Start forming the habit of formulating an opinion for yourself on all those markets. Keep it simple: what is the trend? Is it up or down?
To get on top of all this information, you will need to read the daily financial press to be aware of what is happening in the world markets.
We suggest that besides the information which you can get from the PSG Securities Ltd website other good sources of financial information include:
Remember, that you want to formulate an opinion and then decide on a specific plan of action. You may be wrong initially, but always learn why and then correct your actions.
Prospecting using the financial journalism method
This method uses the financial press, such as the Business Day and Business Report. Other financial press that you may also consider reading would be the weekly publications such as the Financial Mail and Fin Week.
Skim through the newspaper, for example, and look at the headlines for 'bad news. Would any of these companies be recovery situations? Look for opportunities in the Daily Top Ten Up and the Down and Most Overactive columns, etc.
A word of caution though: beware of "analysis paralysis", where you subscribe to every publication and newsletter, and you start feeling overwhelmed with information. Be selective when choosing the resources you use.
You do not make a decision and you do not make money!
Financial journalism method: resources
PSG Securities Ltd
website, as well as many other local financial websites, including www.businessday.co.za, www.busrep.co.za, www.fin24.co.za and www.moneyweb.co.za also offer additional sources of information on interesting looking shares.
Alternatively, focus on the sectors and individual shares of personal interest to you (i.e. become a 'specialist' and then a 'generalist'). For example, if you are an engineer, then focus on the engineering sector. If you are a medical doctor, then focus on the healthcare and pharmaceutical sectors. With whom do you bank with and who are you insurers? There are reasons why you like them.
Once again, you have to do a lot of reading but smart reading!
Prospecting using the fundamental analysis method
This fundamental analysis method means the keeping of a financial diary, in which you would record the financial year-ends of all the companies that may interest you. It is suggested that a bi-annual book like the JSE Digest from Profile Media would be useful in providing this information. You would then anticipate what their financial results would be by first looking at their past five year performances and then estimate what the results would be like within the current economic climate. Would it be "good" or "better than expected"? If you anticipate good results and you believe that the market in general has not picked up on this yet, then you would get in now before the "crowd". Remember, the financial results are usually only printed in the financial press two to three months after their financial year end. This gives you that short window of opportunity to make some money fast!
Alternatively, we suggest that you use the research facilities available on the PSG Securities Ltd website such as the Value and Quality Filter, which saves a lot of time. The Filters help to narrow down the choice by using 12 fundamental search criteria. The Company Analysis is a one page research document on every financial and industrial share, as well as some selected resource and mining companies, which provides all the pertinent research information an investor would require to making well-informed investment decisions.
Utilising the Research Hub
Login into your PSG Securities Ltd account and then follow the instructions below.
Prospecting using the technical analysis method
The technical analysis method of prospecting for shares involves the "scrolling" through of charts using various technical analysis indicators to find shares that are "oversold" or presenting a buying opportunity.
Create a layout as shown above that displays your watch list (i.e. Quotes) on the one side and your technical indicators (i.e. Chart) on the other. You do this by clicking on
Select the share code from the watch list and drop it in the security combo-box. For example, you may be looking for shares where the price is trading below its 5 & 12-day simple moving averages (i.e. the trend is bearish), while the Stochastic Oscillator is trading in oversold territory.
You would select the shares that meet your specific technical criteria.
Prospecting put into practice: Compiling your watch list
Using the four methods as discussed above, you may come up with a list of interesting-looking shares for further investigation.
You may have decided on some shares using the Top-Down Method, some from reading the financial press, some using the fundamental analysis method and some using the technical analysis method. It is this group of shares that you are now going to add into your own watch list.
Compiling your "initial" watch list
Once you have first selected the WATCHLIST tab (Step 1), you will notice that there is a "Default" watch list created, which includes the Anglo share. You can either add shares to this Default watch list or create a second watch list (Step 2). Give your watch list an appropriate name such a "My Financial Shares" or "My Industrial Shares", for example.
Click on the "ADD" button (Step 3) to create a new watch list. Next, you will need to add the shares to your watch list where you will need to know the share codes. If you do not know the share codes, select the "T" in the top-right hand corner to take you to the Code Finder. After entering the share code, click the "ADD" button (Step 4). Should you wish to remove a share from the watch list, select the specific row and then click on the "DUSTBIN" image (Step 5). The watch list shows which shares are moving up or down, compared to the previous day. Between your three watch lists, you will see where the market activity is.
View as Investor Watch List
Once you have formulated an opinion on the general economy (i.e. inflation, interest rates and exchange rates), you will have a better idea of what may affect the general economy. As mentioned earlier, the Value Investor is a very powerful tool for investors to enable them to make informed decisions. Once you have created your "initial" watch list (Step 1), select the "VIEW AS INVESTOR" button (Step 2).
The watch list
changes to show the relative financial ratios. You can then select the individual columns to "rank" the criteria in either ascending or descending order. This enables the investor to then focus on the best possible options. For example, you may only be interested in those shares that are undervalued and profitable and have manageable financial risk, while also paying a healthy dividend.
In our watch list example, MTN Group is the cheapest by PE ratio with a PE of 12-times, compared to SAB Miller with a PE ratio of 20.9 times. The watch list, for example, has then been ranked in ascending order based on the PEG ratio. You can always go back to the original watch list by clicking on the VIEW AS ORIGINAL button.
Step one concluded
Step #1 was to narrow down the choice and create an initial watch list (or three) of interesting–looking shares.
Activity: Ensure that you have compiled your watch list in your PSG Securities Ltd trading account before moving on to Step 2!
Now in step #2, we need to tweak our selection further…
Step two: Gather more information
What is share analysis?
By now you have narrowed your down your choice of shares and have included them into your own watch list on the PSG Securities Ltd website. Now you need to do some share market analysis and this is where the homework comes in! Share analysis consists of the two schools of thought, namely: fundamental and technical analysis.
Fundamental analysis defined
Dividends must be declared (approved) by a company's Board of Directors each time they are paid. For listed companies, there are five important dates to remember regarding dividends.
Fundamental analysis addresses the question of "What share to buy". It is concerned primarily with analysing the future profitability of the company.
Step two will focus on the fundamental analysis part of share market analysis. Essentially this section will answer the "What" to buy/sell question?
When we talk about macro fundamentals, we mean how does the company operate within the economy? If the economy is doing well, then the industry should be doing well. If the industry is doing well, then the individual sectors should also be doing well and hence the companies and the share price. In other words, you want to see growth in the economy.
There are many factors that would affect the economy but the three most important factors are:
- Inflation - This is public enemy number one! Watch the level and trend of the inflation rate and be aware of what may influence inflation. For example, a rising oil price would mean higher transport costs, which will have a knock on affect for everything else.
- Interest rates - The Reserve Bank uses this as a tool to handle inflation. It is also the price of money. Watch the level and trend of interest rates and be aware of what would influence a higher interest rate environment. For example, inflation or a weak currency
- Exchange Rates - The Rand's weakness or strength against its major trading partners does influence companies that are either importing or exporting goods, and hence their shares on the market. Again watch the level and the trend, as well as have an opinion on what influence a stronger or weaker Rand.
Share Info Pages
From your watch list (Step 1), select the share code (Step 2) of the company that you want to analyse further.
This will take you to the SHARE INFO pages of that particular share. Here you will find all the information that will help you make a better, informed decision. You will see today's statistics and how the share has performed compared to the previous day's close. You will see the bids and offers for the share, as well as the intra-day chart. What is important at this stage is to select the RESEARCH tab (Step 1) and then click on COMPANY ANALYSIS (Step 2).
Once you have formulated an opinion on the general economy (i.e. inflation, interest rates and exchange rates), you have a better idea of what may affect the general economy. Now you need to zoom-in on the individual companies in your own watch list. Ideally you would get hold of their latest annual financial statements, which includes the Balance Sheet, the Income Statement, as well as the Cash flow Statement. The quickest way to get hold of these documents is to visit the individual company's website, find the Investor Centre, and then download the latest financial statements in PDF format.
Next, it is about understanding ratio analysis. The most important financial ratios to analyse is not EPS growth, but rather the following:
- P/E Ratio - This is the Price to Earnings ratio i.e. the price of the share divided by the historical earnings per share.
- P/NAV - This is the Price to Net Asset Value ratio i.e. the share price divided by the NAV.
- DY% - This is the Dividend Yield i.e. the dividend per share (DPS) expressed as a percentage of the share price.
- ROE % - this is the Return on Equity, which is the headline profits attributable to ordinary shareholders divided by the weighted average ordinary shareholders' funds. Compare this return with the return of you receive at the bank (which also offers lower risk). If the return from this company is higher than at the bank, then we have a better quality investment.
- Interest Cover - this is one of the most important ratios to consider financial risk. Interest cover should at least be above three times cover, which is the minimum cover required. This means that there are sufficient profits to pay the current interest charge three times. Below this level, we would rarely contemplate an investment.
- Cash/EPS - this is the cash flow per share (i.e. the cash provided by operating activities less depreciation divided by the weighted number of shares) divided by the headline earnings per share (HEPS). Any ratio above 0.75 can be considered very good, while any ration consistently below 0.50 should be questioned.
From the Company Analysis page, you will have a better idea of the nature of business, a comment on the latest financial results, as well as the company's prospects going forward and a recommendation. This is useful in that it helps the investor get to know the company better, as well as fine-tune their watch lists further by removing unfavourable shares.
Ideally you would get hold of their latest annual financial statements, which includes the Balance Sheet, the Income Statement, as well as the Cash flow Statement. The quickest way to get hold of these documents is to visit the individual company's website, find the Investor Centre, and then download the latest financial statements in PDF format.
At this stage, you just want to have a "preliminary fundamental checklist", which will help you decide whether the share in your own watch list merits further analysis.
- Nature of the business: (What does the company do? What are their products, services, divisions, etc.?)
- Sector: (What JSE Sector does it fall into? Who are the competition?)
- Sector PE: (What is the sector PE ratio? How does that compare to the PE of the market?)
- Price: (What is the current share price? What is the last 12-month high and low?)
- Share PE: (What is the share PE ratio? How does that compare to the PE of the sector? Ideally a low PE ratio)
- Turnover Growth %: (What is growth % compared to the previous year? Is it outperforming inflation?)
- Tax rate %: (What is the effective rate % (25-35%)?)
- ROE %: (What is the Return on Equity (ROE) > 20%?)
- NAV: (What is the Net Asset Value (NAV) of the share? Is it trading at a discount?)
- Price/NAV: (What is the share price compared to the NAV? Ideally < 2)
- Interest Cover: (What is the interest cover i.e. >3-times?)
Step two concluded
Step #2 should have provided you with a list of Fundamental Analysis checks which by completing this 'checklist' will ensure that you are able to identify and separate good undervalued shares from overvalued and under performing shares!
Activity: Apply the Fundamental Analysis Checks to the shares in your initial watch list.
Step three: Get your timing right
Technical analysis defined
Technical Analysis serves to determine "when to buy or when to sell" shares. It is concerned with the use of graphs to study historical price and volume patterns in order to predict the future course of share prices. It determines the 'optimum time to buy and sell shares' as opposed to the "intrinsic value' of shares.
With technical analysis, timing is the critical success factor.
Price and volume factors
Technical Analysis discounts fundamental factors and these fundamentals are reflected in the price and volume. Price is determined by supply and demand, while volume is determined by commitment to supply and demand. Price and volume form trends and these trends form patterns. The analyst's job is to identify these patterns for future buying and selling opportunities.
The key assumption upon which technical analysis is based is that the sum of everything that everyone knows or feels about a share, sector or market is reflected in the price and volume. Prices move when there is a change in the feeling or when new knowledge becomes available.
Technical analysis is the study of the share's price and volume chart to search for historical patterns which may help to predict the future price patterns.
Market cycles and trends
Share prices move in a series of peaks and troughs. The direction of those peaks and troughs determine the direction or "trend" of the market. There are three kinds of trend, namely:
- An up-trend - there are more buyers than sellers (i.e. demand exceeds supply);
- A down-trend - there are more sellers than buyers (i.e. supply exceeds demand); and
- A sideways trend - there is a battle for supremacy between the buyers and sellers (i.e. supply and demand are equal).
While there are three trends, there are
only two kinds of market. The share market is always either in a trending market (i.e. the trend is definitely moving higher or definitely moving lower), or it is a sideways or trading market. A third of the time the market is moving sideways in what is called a consolidation period.
Primary or Main Cycle generally lasts between 1 and 2 years and is a reflection of investors' attitudes toward the unfolding fundamentals in the business cycle.
- A primary uptrend (bull market) exists as long as each successive high and low is higher than the high and low of the proceeding up-trend, i.e. an up-trend with ascending peaks and troughs or 'higher highs and higher lows'.
- A primary downtrend (bear market) exists as long as each successive high and low is lower than the high and low of the previous down-trend, i.e. a down-trend with descending peaks and troughs or there are lower highs and lower lows.
The Secondary or Intermediate Cycle is countercyclical trends within the confines of the primary cycle trend. These secondary cycles are more commonly known as 'corrections' within an uptrend and as 'rallies' within a downtrend. They last anywhere from 3-weeks to as long as 6-months or more.
Minor or Short-term Cycle, which last from 1 to 3 or 4-weeks, interrupts the course of the secondary cycle, just as the secondary cycle trend interrupts the primary cycle trend. These minor cycles or daily fluctuations are usually influenced by random news events and are far more difficult to identify than their secondary or primary counterparts. Generally speaking, the longer the time span of the trend, the easier it is to identify.
Technical indicators: Price charts
Over the years, technicians have devised a number of different ways of physically representing market data on charts. The most popular charts are the closing line chart and the bar chart.
The interpretation of the bar chart is based on chart formations and the relationship between price and volume. These charts are used mainly for jobbing or short-term speculating. They also highlight chart patterns, which are of a much shorter-term nature e.g. exhaustion and breakaway price gaps, key reversal days, etc
Use a 200-day moving average to help you establish whether you have a bull market (i.e. rising prices) or a bear market (i.e. falling prices). Should the price be above the 200-day moving average, the trend is upwards or bullish and should the price be below the moving average, we have a bearish or downwards trend.
Use another two different shorter-term moving average time periods; the longer period for the trend, while the shorter period as a trigger. For example, start with a 10 & 30-day Simple Moving Averages (SMA). Once you have established whether the current market is a 'trending' or '
trading market' and where the market is now compared to the primary, secondary cycles and short-term daily fluctuations, then you consider getting your timing right. Moving averages are very basic tools and they are your starting point when it comes to technical indicators.
The Overbought/ Oversold (OB/OS)
The Momentum indicator
The MACD indicator
- Early watch signals occur when the MACD indicator crosses above or below its trigger line.
- Buy signals occur when the MACD indicator crosses above the oscillator line into overbought territory.
- Sell signals occur when the MACD indicator crosses below the oscillator line into oversold territory.
The Relative Strength Index (RSI) indicator
- Buy signals occur when the RSI indicator crosses above the 30% level.
- Sell signals occur when the RSI indicator crosses below the 70% level.
The Slow Stochastic indicator
Technical Indicators: Volume analysis
The On Balance Volume (OBV) indicator
The Volume Price Trend (VPT) indicator
Relative strength analysis
Relative Strength analysis is often used to compare a share or sector's performance with a market index. It is also useful in developing spreads (i.e., buy the best performer and sell the weaker issue).
The Relative Strength indicator
Technical analysis checklist
- Establish the trend - Is it upwards, downwards or sideways?
- Establish the cycles - Is it a bull or bear market? Or is it a correction or rally?
- Moving Averages - Start with a 21 & 40-day moving average - is the share price trading above or below these moving averages? When was the last crossover?
- Establish Overbought and Oversold levels - Use the OB/OS indicator; the Momentum indicator; the RSI indicator, the Slow Stochastic & MACD indicators.
- Volume Analysis - Look at the volume histogram - is the share tradeable or free-dealing? Do the On Balance Volume (OBV) & the Volume Price Trend (VPT) indicators show volume accumulation or volume distribution?
- Relative Strength Analysis - Compare the share or the sector relative to the JSE Overall Index - is the share under performing, market performing or outperforming?
Step three concluded!
Step #3 would have provided you with a more in-depth understanding of how to use technical analysis indicators to assist you to buy and sell shares at the right time!
Activity: Compile graphs using the technical analysis indicators you have learned to the shares in your watchlist
Step four: Build a balanced portfolio
Portfolio management strategies
What is portfolio management?
Portfolio management is important as it means getting the maximum from one's share investments. Remember, you main goal is to maximise wealth by maximising returns (i.e. portfolio strategies) and to minimise risk (portfolio management). It can be expected that these will be extended to tie in with certain overseas markets.
Portfolio strategy - You need to decide if you are an investor or a trader? If you are more the conservative type investor or have a longer-term outlook, then you may consider the buy and hold strategy to investing on the share market.
Buy and hold strategy - The objective is to develop your investment portfolio and only make adjustments when absolutely necessary. This strategy is often the most sensible and least risky strategy to choose. The medium to long term buy and hold strategy will almost always outpace inflation.
If you are more the aggressive-type investor or have a much shorter term outlook, then you may consider the
swing trading strategy or even shorter jobbing strategy.
Swing trading strategy - This is a more leisurely version of jobbing, where the objective is to climb in at the bottom and jump off at the top. Timing is the critical success factor.
Jobbing strategy - Jobbing is enjoyed by bold speculators who seek excitement. It is a process of jumping in and out of shares and taking advantage of very small price movements. Jobbing requires an active ear to the ground, an in-depth knowledge of the share market and takes up more time. Here you have to be careful from a tax point of view as you may be classified as a share dealer and be taxed accordingly.
Portfolio spread or diversification
People invest in the share market because of the potential for high returns, but this comes at a price. This price is the higher risk associated with share market investments compared with, for example a fixed deposit with a bank. To reduce risk, one basic principle of portfolio management is diversification.
Diversification means to spread your capital among different shares and industries. By doing this, one reduces the risk of losing money if things should go wrong with a particular share or shares. "Concentrate" one's portfolio by carefully choosing between 8 and 12 shares across 3 to 5 sectors.
Portfolio structuring is similar to diversification, but instead of spreading holdings across market sectors, you diversify your portfolio in terms of quality and time frame. The classic traditional portfolio consists of a well-balanced selection of "blue- chip" shares that are held indefinitely. This tends to minimize risk, but does not allow for exceptional returns. Portfolio structuring attempts to improve the return on a portfolio, without increasing the risk.
The typical structured portfolio should have the following:
- 50-70% would remain in blue-chip shares (i.e. Top 40 shares) with a long-term view.
- 20-40% would be placed in growth shares (i.e. Mid Cap shares) with a medium-term view.
- 10-30% would be used for active trading in speculative shares (i.e. Small cap shares or Alt-X shares) with a very short-term view (i.e. maximum 3-months).
Portfolio stop loss strategy
The biggest enemy in the share market is human emotion (i.e. greed & fear). The biggest challenge to you, as an investor, is to remain objective. One way to eliminate human emotion is to apply a stop loss strategy. Just as a seat belt is there to protect you in your car in the event of an accident, so does the stop loss strategy attempt to protect you, the investor, from the unexpected. When it comes to successful share market investment, it is not so much a story of capital gains that is important, but rather one of avoiding capital losses.
The major function of a stop loss strategy is to limit your losses to a pre-determined amount. This is an essential tool for traders, speculators or short-term investors. Most successful long-term investors snub the use of stop loss strategies, as they rather limit their downside risk by proper diversification and detailed fundamental research. However, traders normally lack any wide diversification as well as detailed fundamental research and therefore need some other method of safeguarding their capital. A successful trader has to have an extremely strict selling discipline.
A long-term investor can be right at the wrong time if he has patience. A trader who's right at the wrong time, however, is not a trader for very long. Traders that see a share fall and then decide to hang on to the share, pretty soon lose their capital. A good trader is an opportunist who risks his capital with the object of making a large profit within a small period of time. If the position turns against him he should cut his losses or take his profits immediately and move onto to another position. He cannot afford to base his future on the vague hope that he will be proven right and the share will recover at some later stage. A trader cannot afford to have his capital locked into a position that is not working for him, this capital should reallocated to a more profitable position.
A stop loss strategy automatically fulfils this function. After buying a share the trader should determine the loss he is prepared to take (normally between 10-20%) and immediately place a stop loss order. For example if he decides the maximum loss he is willing to accept is 10%, and then buys a share at 1000 cps, then he should place a stop loss order to sell if the price is smaller or equal to 900 cps. If the share price now falls to 900 cps or below, the trader should immediately give an order to sell the shares at the specified price. Depending on the liquidity of the share he should then have sold out at a 10% loss.
Another and actually better method is to place an automated trailing stop loss order at say 10%. This means that as with the above example if the share drops by 10% an order will be placed to sell out. In addition if the share increased to 1500 cps, the stop loss will automatically trail the share price and the new stop loss order will be at 1350 cps (10% below the current share price of 1500 cps). When the share now drops 10% from its high a sell order will automatically be generated at the new stop loss of 1350 cps.
The same applies when the share price has moved higher to 2000 cps. The stop loss order will be trigger when it reaches 1800 cps. In this manner is able not only to limit his losses but also to lock in profits. This is a strategy that every trader should consider to ensure his longevity in a sometimes very volatile market.
Portfolio management checklist
- Have you established whether you are a conservative investor or an aggressive trader?
- Have you decided to use the buy and hold strategy if you are a conservative investor?
- As a conservative investor, have you established the portfolio structure along the lines of good quality blue chip shares with a long-term view?
- As a conservative investor, have you established the portfolio diversification along the lines of different industries and different sectors?
- As a conservative investor, have you decided upon what factors would cause you to sell your long-term buy and hold shares?
- As an aggressive trader, have you decided whether you would use the swing trading strategy and/or the jobbing strategy?
- As an aggressive trader, have you established the portfolio diversification along the lines of different industries and different sectors?
- As an aggressive trader, have you decided on the portfolio stop loss strategy?
Step four concluded!
Step #4 would have provided you with knowledge on how to build a diverse portfolio whilst managing your risks.
Activity: Apply the portfolio management checklist to your portfolio management checklist to your "prospect" watch list (i.e. after reducing the "initial watch list" using fundamental critical & technical analysis).
Essentially all of these steps together from the foundation for any good investment strategy. The more you are able to apply and put into practice using these investment methods you will be able to make more informed trading decisions. Ultimately, the more time you spend on mastering these steps the more likely you are to be successful and profitable in your wealth creation endeavours.
Step five: Placing your first equity trade
So why trade on the simulator? Well, it beats losing real money and we want you to make lots of it. You trade on the simulator to learn how to place your trades on the trading platform. You also trade on the simulator to learn and to develop good trading habits. You
gain confidence in your stock-picking abilities. You can test your ideas and techniques in a risk-free trading environment. You will learn how to read your charts, how to read the markets, how to find chart patterns, what to avoid, what to look for and most importantly, you learn to trust your judgement. The idea is to get a record of accomplishment going in your simulated trading before doing the real thing. You will sense when you are ready.
One of the biggest disadvantages for trading on the simulator is that it is not real and therefore creates a false illusion as there are no emotions involved. Some people feel that simulated trading is the biggest mistake that novice traders can make. They feel that this is the most counterproductive way to learn how to trade properly. When simulator trading, every single trading decision is based on zero emotions. You are actually training yourself how to decide entry and exit targets based on no risk. It is a fact that the greater the risk, the greater the reward. As simulator trading has zero risk, it has no reward. It will actually increase your risk to gain reward when you start to trade with real money because you have been teaching yourself how to make decisions that do not apply in the real world. When you start to make these decisions in real life, it will be financially devastating.
In order to trade properly, traders must possess 100% technical skills, but they only need to apply 15% of these skills when trading. The other 85% of the equation is keeping their emotions under control. Trading profitably is 15% technical and 85% emotional. So how do you keep your emotions in check? To do this, you must determine how much money to risk during the learning curve that makes trading a productive and educational experience. We do not suggest that you risk all your starting capital on each trade to make sure that you are "emotionally trading the markets." As individuals, we all have a different financial situation, and each person will have a certain amount of money at risk that triggers a specific amount of emotion. Do you think a person with risk capital of over R 2-million is going to be emotional with R100 at risk? If this person buys 100 shares of a R 20 share and the shares trades down to R 19, is he going to have any emotions? We are sure that if he owned 10 000 shares in this situation, there would be a large number of emotions involved, probably too many emotions.
The secret to educational and profitable trading is to closely monitor your emotional risk level and change your actions as necessary. This can also mean lowering your risk capital. My friend who was comfortable with $400 had to lower this amount to $300 after he and his wife found out they were pregnant and decided they needed to buy a house because their rented apartment was too small. This added more financial responsibility, and the down payment on their home lowered his risk capital. Numerous variables can come into play and influence a person's emotional risk level, and only you can judge where this level should be. No one knows your situation better than you do.
For those who are completely new to direct market access (DMA) trading, simulated trading can be helpful only when you are learning the trading platform. It is not wise to begin trading with real capital while trying to learn the trading platform. If you do not know how to set up charts, watch lists, order entry, and if you are not familiar placing order online, trading in a simulated environment is recommended when you follow a specific set of rules. Most simulator accounts allow you to trade with a R 100 000 starting capital and also provide you with fictitious order fills.
So in order to learn properly using a trading simulator account, you must follow these guidelines:
- Try to match your starting capital. If you plan to open a trading account with only R 50 000, then trade with only R 50 000 of the standard R 100 000. The reason for is to make sure that you do not get used to risking more money than you have. If a new trader is used to risking R 100 000 in simulator account, he is more likely to risk too much when he "goes live" trading real capital.
- Trade the amounts that you feel comfortable with. You should trade share sizes that meet your emotional risk level. You do not want to get used to trading 2000 shares when, in reality, you will be using only 200 shares or whatever amount meets your emotional risk level.
- Ignore unrealistic order fills that overpay for each trade. Trading simulators will often fill your order at a price that would never happen in the real world. If you want to buy a share that is currently trading at R 20, place your order for R 20.05 and when you want to exit, do the same. If the share moves up to R 21, place your sell order for R 20.95. This helps the trader get used to real life order fills. You do not want to get used to the paper profits that would never occur in real life.
- Create real emotions while trading on the simulator. Find a friend to compete against with simulator trading. For each Rand that you win, the other player must pay you R5 and vice versa. (Make sure you place a cap of R100 during your friendly competition.) This helps bring emotional trading decisions into the equation.
As soon as you are comfortable with the trading platform, stop simulated trading and start trading live and with real money, but make sure you stay within the lower limits of your emotional risk level during your first week. You will become a successful trader more quickly trading in live mode than if you trade in simulator mode. Continuous simulator trading will decrease your odds of successful trading because after doing something repetitive, it becomes instinct. Trading an unrealistic trading account size, unrealistic share sizes, getting unrealistic order fills, and trading unemotionally with no real risk repeatedly will provide you with instincts that are useless and counterproductive. When you decide to trade live after trading on the simulator, you will actually trade at a level below someone with no experience. Before you can advance, you will have to shed all of your bad habits.
How do I place my first trades on the Trading Simulator?
By the time you decide to start trading on the simulator, you have hopefully decided on:
- An investor profile? (Conservative, Prudent, Aggressive & Speculative)
- An investment strategy? (Value investing and/ or Growth investing)
- A risk management strategy? (Diversification & Stop loss)
- A prospecting strategy? (Top-down, Financial press, etc.)
- You would have also created three Watch lists? (e.g. Mining, Industrials and Financials)
From these watch lists you have then decided on shares that are:
- Fundamentally undervalued, profitable and safe?
- Technically in a bullish trend, oversold and outperforming relative to the market?
Depending on your strategy as either an investor or trader, you would then decide on:
- Structure (Number of shares)
- Spread (Across 3 - 5 sectors)
- Stop loss strategy (What percentage?)
Getting started - Confirm your starting capital
- Step 1: Once you have logged into the PSG Securities Ltd website with your Username and Password, please select the EQTSIM (Equity Simulator) from the account drop-down list in the top right-hand corner.
- Step 2: Confirm whether the balance shows R 100 000 in starting capital.
- Step 3: Click on the Reset button (If this is required to restore the cash balance).
The process of placing a trade (Buy) in the New Order book
Step 1: Select the New Order button.
Step 2: Enter the Share Code (e.g. NPN).
Step 3: Click the Go button.
Step 4: Confirm that it is the correct share.
Step 5: Select the Order button
Step 6: Select the order side (e.g. Buy)
Step 7: Enter Quantity i.e. number of shares (e.g. 22 shares)
Step 8: Enter a Price in cents (e.g. 40500).
Step 9: Click the Submit button.
Confirming the trade in the Order Book:
- Step 1: Select Order Book tab.
- Step 2: View and confirm the Simulator Order.
Confirm the trade reflects in your Portfolio/ Holdings:
- Step 1: Select Portfolio tab.
- Step 2: The share appears in the Holdings.
You can check the brokerage costs in the brokerage calculator:
- Step 1: Select the "T" for TOOLS
- Step 2: Select the Brokerage Calculator
- Step 3: Enter the Price and Volume.
You would repeat the process for all additional purchases (i.e. Buys), while the process is very similar for sales (i.e. Sells)
The process of placing a trade (Sell) in the New Order book
The process for selling is exactly the same …
- Step 1: Select the New Order button.
- Step 2: Enter the Share Code (e.g. AGL).
- Step 3: Click the Go button.
- Step 4: Confirm that it is the correct share.
- Step 5: Select the Order button
- Step 6: Select the order side (e.g. Sell)
- Step 7: Enter Quantity i.e. number of shares (e.g. 29 shares)
- Step 8: Enter a Price in cents (e.g. 27400).
- Step 9: Click the Submit button.
Again, you can select the Order Book to view the transaction:
- Step 1: Select Order Book tab, while in Step 2: View and confirm the Simulator Order.
Again, you can confirm the Trade (Sell) does not reflect in your Portfolio/ Holdings anymore, namely
- Step 1: Select Portfolio tab and then in Step 2: The share would have been removed from the Holdings.
How do I use the Price Watch alert?
We decide to use a Price Watch to alert us the next time a share price drops by 10%. The process is similar to selling and is exactly the same again…
- Step 1: Select the New Order button.
- Step 2: Enter the Share Code (e.g. NPN).
- Step 3: Click the Go button.
- Step 4: Confirm that it is the correct share.
- Step 5: Select the Price Watch button
- Step 6: Select the order side (e.g. Trailing %)
- Step 7: By Price(c) / %, enter percentage (e.g. 10%)
- Step 8: Click the Submit Price Watch button.
The Price Watch will trail the share price by 10%. Should the share price drop to this level, you will be alerted via email and/ or SMS. You should then sell the share.
- There are five steps to choosing your first shares, namely:
- Narrow down the choice;
- Gather information;
- Get your timing right; and
- Build a balanced portfolio
- Start Trading
- There are four methods to use when prospecting for interesting-looking shares, namely:
- Top-down method,
- Using financial journalism,
- Using fundamental analysis, and
- Using technical analysis.
- The two most important factors to watch when it comes to the "big economic picture" are:
- Inflation rates; and
- Interest rates.
- There are many financial ratios, but the most important ones are:
- HEPS Growth %,
- Turnover Growth %,
- Operating Margin %,
- Interest Cover,
- Effective Tax Rate %,
- ROE %,
- Debt/Equity ratio,
- Cash/EPS and
- Some basic technical analysis includes: Trends and cycles analysis; the use of price charts (Closing Line Chart and Bar Charts) and technical analysis indicators such as Moving Averages (21 & 40-day Simple Moving Average crossovers), the OB/OS indicator, the Momentum indicator, the RSI indicator, the Slow Stochastic indicator, the MACD indicator and the Volume Indicators such as the OBV and VPT indicators as well as the Relative Strength indicator.
- There are three ways to make money using portfolio strategies, namely:
- Buy and hold,
- Swing trading, and
- There are three ways to manage the risk in a portfolio, namely:
- Portfolio structuring, and
- Stop loss strategy
If you have any further queries, please feel free to contact our educational team on
firstname.lastname@example.org or call 0860 774 774.
Thank you for your support and happy trading!