For the vast majority of people the Stock Market is a concept, which they simply cannot understand and therefore they have misinformed opinions of how risky it is.
I heard a comment on a morning television show; “The share market is up today which is great for all of those Mum and Dad traders!”
One of the major misconceptions of the Stock Market is it is full of Mum and Dad traders. This is why it is common for people to liken it to betting on a horse race or gambling.
In fact it is a misconception that market is full of traders betting on individual shares moving up and down to make money at the end of each day.
It is these stereotypes and ill informed views which lead people to believing that the stock market is more risky than other types of investing.
The best way to understand the risk of any investment is to understand how that investment works. So before you express an opinion or worse, hand over your hard earned money, take the time to fully research the investment and understand it.
In the stock market there are two opportunities to make money, one is buying the trend and the other is buying value.
For less active investors or those who want to take less risk I would recommend Value Investing.
To invest in a trend you generally have to take an overweight position to make it worthwhile. Which means the risk of loss of capital is increased.
Value investing is when you look to find an opportunity where a company is trading below it intrinsic value (fair value). The first step in value investing is to be able to value a company at what it is worth.
You can do this yourself or you can buy the research from an independent third party. Independent is the key, if you buy research make sure that the company you are buying from makes their money from selling research and has no link to investment banks.
Once you have a list of companies you like, you then simply wait for an opportunity to buy them less than their intrinsic value.
The reason companies will trade below their fair value is beyond me except to say that the market in general has a short-term time horizon and is not logical when dealing with bad news.
As the market is made up of people, it is prone to emotional responses to negative news. It is this emotion, which leads to companies being oversold.
Once you find and buy one, prepare for a long wait before the company recovers.
If the fundamentals hold, then the company will eventually move back up to intrinsic value and generally beyond.
Trend investing is when you are looking for a trend in the market. The most recent and obvious trend is investors moving out of cash due to the low interest rates and into high yielding blue chip companies. This has seen the ASX 20 outperform the broader market recently.
If you are able to spot these trends early enough you can hitch a ride and achieve good results, however trends have their downfalls. You need to ensure you get in early in the trend, getting in late will generally lead to a loss of capital.
A trend will terminate at some point which leads me to the second part of trading a trend, when to get out.
The obvious answer here is at the top. However, this statement makes no sense as you only know when the top is after it has topped. Exiting at the top is 100% luck not skill.
The time to exit a trend is when you have achieved your goal return. Do not get greedy. Always leave some upside for the next person.
If the trend turns down, get out and cut your losses.