ASX how to make and lose Money
ASX is Australians biggest and primary share and securities market. It is a stock exchange and a stock exchange deals with securities of the listed companies. These securities include shares belonging to different listed companies. Now, since ASX is a stock market, the rules of stock market apply on ASX and so if you want to make money the rules for you are the same that investors in Dow Jones for example have.
A stock market is a place where you can either go big or go home. Stock investment has created billionaires and it has also created beggars out of former billionaires. Those with less affinity to trading consider this as almost as gambling but stock trading isn’t gambling. No, it is far from gambling. Gambling is a game of chance where at most you have the support of probability on your side. Stock trading is much more sophisticated than that.
1. How to make money in the ASX
In order to make money in the ASX you need to ask yourself two questions. The answer to these questions will determine how you are going to invest your funds.
Question #1: Are you looking for short term profits or wealth creation in the long run?
If you are looking for short run profits then you are going to have a trader’s mindset where you will intend to earn money through the volatility of the market. Trading like this is much more difficult and risky than investing your money for the long term.
Long term investors who look for wealth creation instead of short term profits fare better off because they skim over the day to day volatility. They are not interested in the volatility and short term gains because they believe in mean reversion.
Mean reversion is the concept that in the long run the gains in the stock market average out. So you may lose tomorrow when the market crashes but then you may also gain next week when the market ounces back.
Long term investors do not panic when the market dips and similarly they do not get excited at the prospect of profits when the market reaches a high. Instead they focus on the long run capital appreciation and gains.
Therefore, if you are looking for short term profitability then you must be prepared for high risk trading whereas if you are in it for the long run then you should have enough funds because long term investment means that you invest your funds for say 10 to 20 years may be even 30 and forget them.
Question #2: What is your Risk appetite?
Risk appetite will define how much you can make. Ideally, the risk-reward relationship means that the more you are able to risk the more you stand to gain. But in reality, it doesn’t always work like this. Most traders go for the moderate approach where they balance out their risk appetite and only very experienced traders who can sense the pulse of the market tend to go for high stakes trading.
If you are an amateur trader then you are better off with a moderate risk appetite because gong for high risk trading can most certainly make you go bankrupt before you can even get the hang of trading.
2. Get Professional Help
Yes this may sound very boring but if you are new to trading in the ASX then your best bet is to get professional investment help. You can hire an investment advisor for a good some of money and doing so will make you thank me later. It is better to spend some money on an investment advisor than to lose loads of money making amateur mistakes.
An investment advisor will guide you and tell you which stocks are best for investment. You will need to discuss your goals and strategy with your advisor because this will help him draw up an investment strategy that suits your needs best.
3. Build up your portfolio
Building up your portfolio is very important. You do not want to invest in a single company, this is the most dangerous thing that you can do as an investor. You should never depend on returns from a single company. Instead invest in several different companies across different sectors to diversify your investments. In addition to this it is also better to invest in other assets too so that if the ASX crashes, you can bank upon other investment assets to cushion your losses.
4. How to lose money in ASX?
Losing money is far easier than making it, this is a universal truth really. In ASX for example if you aim to cash in on the volatility of the market then you should consider that every time you trade, you will be subjected to capital gains (if you make a gain) and brokerage costs. These are called frictional costs and frequent traders experience high friction costs that can end up eroding a considerable portion of your wealth.
An investor who trades actively for example can see his returns swell up to $100,000 over a 40 year period at 6% to 9% rate of return whereas another investor who holds on to this initial investment and reinvests the dividends to achieve compounding can in the same period see his returns swell up to $200000. The difference between both investors is of frictional cost. As an active trader you may feel that you are making a profit on your trades but in the long run these frictional costs can amount to a lot of lost gains.
Trade on Speculation
Another way to lose money is through speculation. If you trade based on your whims and what the general “rumours” are in the market then you are bound to lose money. These things only work in movies, not in real life. With trading, there is no such thing as luck. If you want to make money through trading then your trading decisions need to be based on factual information and a well-defined strategy. Unless you do this, you’ll find ASX as a great way to lose all the money you have.
ASX is the premier stock market of Australia and therefore it presents immense opportunities for investors to make a fortune however a stock market is no place for amateurs. If you do not have prior trading experience then it is suggested that you use the services of an experienced investment advisor, otherwise, you will be responsible for your own loss.