Four things to look out for when buying shares
Whether you’re brand new to this or a seasoned investor, these four tips could help you avoid serious investment mistakes:
1. Don’t get yourself caught in a liquidity trap – Never buy more than 10% of a share’s daily traded volume.
Here’s what I mean…
Let’s say you have R50,000 to invest and you decide to put it all in one share. But this share only has a total trading volume of R50,000 per day – this means you just bought 100% of a shares daily traded volume when you should only be buying R5,000. Now this share goes up by 100%. That means you are sitting with R100,000 wor th of it.
That means you’d end up having to wait multiple days just to sell it if the trading volumes of the share stay roughly the same… If that happens you could end up not getting all your shares sold at the price you’re looking for, or worse, you could end up not being able to sell all those share at all.
So as a rule, always make sure you buy no more than 10% of a share’s daily traded volume. That way, you know you’ll be able to sell your shares easily when the time comes. There’ll at least be enough buyers to take your shares of your hands.
You can ask your broker to tell you what the one month average traded value of a share is if necessary. Alter natively you can easily find this data on an online trading platform.
2. Position yourself for prof its, but don’t bet the house – Never put ALL your money on the line at any single time. If you do, you could wipe yourself out on a single loser. So, my rule of thumb is this – if you have less than R30,000 then invest R5,000 in each company you buy shares of. If you have between R30,000 and R100,000 you should be buying R10,000 worth of shares at a time. And when you have more than R100,000 you should put between 5% and 15% of your money into shares you buy.
3. Don’t let the gains slip away from you before you buy a share – Don’t buy the share outside my quoted price range – EVER.
Penny shares are volatile. They often move 10%, 20% or even 30% in a single day. The biggest mistake new investors make is buying a share at any price. I’ve seen many investors buy a share after it has jumped 30% in a day, just to see it drop back to its initial level the following day. To avoid this happening set a limit order when you want to buy a share. Basically this means you tell your broker that you only want to buy a share below a certain level.
If the share goes up higher than that, you won’t buy.
Yes, you could lose out on one or two oppor tunities this way. But I send out around twenty four tips a year. Missing one or two opportunities isn’t the end of the world, but buying a share 30% higher than you should, could blow your prof its out of the water.
4. Make sure you can take the thrill of investing in penny shares! – Psychology is an impor tant part of investing in penny shares.
Like I’ve said, penny shares can go up and down very quickly. While this gives them great prof it potential it can also make it a nerve wracking experience.
Seeing thousands of rands of profit swing into losses can be daunting. And if you start acting emotionally you could see yourself losing out big time.
That’s why I always say you should never trade more money than you’re comfortable with losing.
And lastly, remember, I am there all the way. So if a share is starting to get the better of you, don’t let your emotions take over. Rather go to the Investors Club
, ask about the share and I will tell you what’s going on so you can make an informed decision!