Fancy yourself a stock trader? An investor? A would-be Warren Buffet? A Wall Street Bets punter who self identifies as an idiot but who has all the luck of a four-leaf clover?
Though you may have seen headlines like Wall Street Pros Sheepishly Admit To Following Twitter’s Day Trade Army For Stock Tips and all sorts of excitement about ‘amateur hour’, with groupthink experiments like this one (which told everyone to invest in the flailing AMC) proving a tsunami of retail interest can (at least temporarily) prop a company up despite it being shorted to the hilt by Wall Street, the truth is, as a rookie investor, you are still as vulnerable as ever to come a cropper. More so if some early luck has gone to your head.
So: however you like to classify your Saturday/Sunday fluttering, there are a few things you should know. First of all, if you are anything like many of the masses who downloaded eToro or Robinhood out of boredom during lockdown, you don’t want to get ahead of yourself and call yourself an investor. You’re only an investor if you have researched the company and truly believe in it (and hold a long term view of it).
Secondly: though you – point-blank – shouldn’t be throwing your hard-earned cash at ‘Wall Street Bets’ Reddit recommendations (or random ‘ant farm in Sierra Leone’ recommendations from friends and family) or worse than small-cap crypto ‘moon shoots’ recommendations (as a DMARGE writer recently learned the hard way), if you are going to do it, don’t borrow money to do so.
As Kitara Investments CIO Tolga Kumova recently said on The BIP Show podcast, if you’re investing at the junior end of the market “you’re already levered.”
“I wouldn’t borrow money to go and invest in this [small cap] space,” he said, talking about his early days as a trader. “Risk return is massive already and you don’t want to get wiped out.”
It’s also worth noting he was doing this as a professional, not as a weekend hobbyist. And even he managed to get caught off guard.
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With the preface that this is not financial advice and just a conversation of a general nature, he told The BIP Show: “I traded CFD’s – this is back when I was trying to make my bankroll – and I borrowed money on a credit card and I was trading FX, Aussie, US, non-stop and I won’t go into too much detail but I made a lot of money.”
“The return was ridiculous in terms of the money that I put in [compared] to what I pulled out… I reckon it was 500, 600 or 700% – more. But I pulled that money out and I left 30% of what I had made in there. I lost that in a day.”
“The second I thought I knew what I was doing it was gone the next day. I was in debt to the CFD provider and I thought this is not for me – I can’t do this because you basically just do not sleep.”
“You’ve got to be thinking about it, looking at it all day every day – you don’t have a life. I realised the quality of life vs. taking a position, doing your work and understanding a position and understanding the risks of that position is more rewarding.”
“That’s what pushed me from trading.”
He also said “the difference between trading and investing is time frame,” explaining that though you may see people on Twitter posting their daily updates, “I’m sure they’ve got a portfolio in the background where they’ve got a longer-term view on certain companies.”
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Interest piqued? Still intent on pursuing those risky as heck ‘daily updates’? In the interests of keeping you on the straight and narrow, here’s some good general advice for rookie traders, courtesy of eToro.
DMARGE spoke to Josh Gilbert, market analyst at eToro. Mr Gilberst says these are the questions you should ask yourself before investing in any company.
Do I understand basic stock market terminology and my chosen investment platform?
Before you start investing, make sure you understand the general lingo and how your preferred investment platform works, Mr Gilbert says.
“You don’t want to accidentally lose money because you misunderstood a term, or clicked the wrong buttons. Some platforms, like eToro, allow you to use a virtual portfolio before you start investing real money, so you can learn the ropes with zero risk.”
“Remember, practice makes perfect.”
What are my investment goals and strategy?
“Not having a financial plan can lead to lack of focus and being easily swayed or impulse investing which often doesn’t end well,” Mr Gilbert said.
“If you don’t have a plan for how to manage your money, you’ll be more vulnerable to impulse buying, overspending and making other unwise decisions. Even if you are earning a lot, failure to plan will likely ruin your set objectives.
“You should avoid setting goals that are vague, too broad or exaggerated with no timeline,” Mr Gilbert added.
“An example plan could include outlining how much capital you want to invest, the time you want to spend in the market, how many companies or assets you want to invest in, and ways you might hedge against risk- such as diversifying your portfolio or setting stop limits.”
Do I really understand what this company does?
Mr Gilbert told DMARGE: “Ensure you have a basic understanding of what the company does before taking the financial plunge and investing in the stock” and “invest in what you know.”
“By investing in your passions and interests, you are more likely to understand how they best operate.”
“For example, if you love tech, you may decide you want to buy stocks in Apple or Microsoft. Or, if fashion is more your thing, you might want to consider ASOS or H&M. But of course, do your homework on them first, instead of going in blind.”
Am I being led by FOMO?
“Are you just simply investing in a stock because everyone else is? Or because the headlines and ‘finfluencers’ have hyped it up as a ‘must have’ for your portfolio?” Mr Gilbert asks.
“Instead of investing in a stock because of FOMO (fear of missing out), ensure you’re investing for the right reasons and do your research. Do you actually see potential in this stock? If the answer is no, it’s best to back away.”
Am I investing more than I can afford?
This is a big one. As Mr Gilbert told us, “It’s important to understand your risk appetite and how much you can realistically afford to invest, and worst case, lose.”
“It’s a common misconception that you need a lot of money to make investing worthwhile. Thanks to the proliferation of everyday-people-friendly tech platforms, you can invest with as little as USD $50.”
“If you start low but invest regularly, you’ll be surprised how quickly your portfolio will build up.”
“Be mindful of your limits and think about whether you could realistically afford to lose the amount you initially invested in a worst-case-scenario,” he added.
“High-risk mindsets amongst inexperienced investors may result in losses, especially during the global pandemic when markets have been extremely volatile.”
What value will this stock add to my portfolio?
“The truth is, you don’t need to invest in stocks because they’ve just listed and are ‘hot,’ Mr Gilbert told DMARGE. “All stocks should meet a need in your portfolio and it should essentially add an exposure that you already don’t have.”
“Try to diversify your portfolio with a range of different stocks from different industries, as well as commodities and cryptoassets to ensure your portfolio is balanced.”
Do I really understand the risks associated with investing in stocks?
Finally, Mr Gilbert left us with one final warning.
“You should understand that regardless of market conditions, investing in the stock market can be risky.”
“This is why it’s crucial that you’re able to comprehend what you’re investing and don’t invest more than you can afford to lose.”