In micro investing bulls and bears make money but pigs get slaughtered
Eric Tippelt | March 31, 2017 | SmallCapPower: Micro Investing takes practice, and in my last article we said that you should practice like it’s real for 6 to 12 months. Part of that is so that you learn how your trading platform works, and how to use the research tools they provide, and all the terminology that goes with stock investing.
Who’s Platform should you use? Your call. Every major Canadian Bank has a trading group, along with dozens of other traders out there. I would recommend that you start with where you do your banking. They may not be the cheapest when it comes to trade fees, but a lot of them have good deals for new accounts. 50 free trades, for example. Most of them offer interest (low but something) paid on cash balances. They also offer simple charts, company reports, and screening tools, which you will need to learn.
I like that I can easily move money between my trading accounts and my regular accounts online. Another excellent feature is that your online trading account can be set up as an RRSP (self-directed), a TFSA, U.S. Dollar, or Canadian Dollar account. Using the TFSA and RRSP accounts are great ways to shelter your profits from taxes. The TFSA shelters them forever, the RRSP just until you withdraw the money.
As a Micro Investor (<$5000.00) I would strongly suggest you use a TFSA. You cannot claim any losses, but you will never pay tax on the profits. Opening an online trading account can be done easily, either at your local branch, or online in most cases.
If you do not want to go to all that trouble, and just want to practice, you can set up an account on the TSX Website (www.TSX.com). That will allow you to set up several portfolios and will track your stocks and expenses very well. They also have a whole list of research tools available.
You are now ready to begin. You have an account to use for imaginary buying/selling and learning how to research. You will use only the amount of money you will actually have to invest. I am going to use $500, the amount I started with. What now?
Well, why not go to Small Cap Power and start looking at the stocks they are featuring. They have a nice feature in that they show the stock price at time of printing. This helps you to see which are reasonable for you to buy. You can use a Stock Screener from your account tools, to give you suggestions as well.
We have seen a company that we think will be a good buy. Great Lakes Graphite Inc. (TSXV: GLK). This is just as an example!! Each company has a Symbol (GLK). These are how the shares/company are identified. Most Canadian companies have 1 to 3 letter symbols, but 4 letters are beginning to appear.
Graphite is an important part of Lithium Batteries. That sounds like a product whose use will increase. So, good chance Great Lakes Graphite might go up. It sells in the 9 cent range. We decide to buy this stock. We go to our trading account software (I will use the TSX since it is generic and everyone can access it) and go to our portfolio. (http://web.tmxmoney.com/account/login-register)
Enter your Login and Password to gain access to your portfolio.
Click the Add/Edit Symbols button.
Once you have entered all the data it now looks like you bought those shares (you didn’t really). Total cost of those shares was: 2000 (total shares) X $0.09 (Cost/Share) + $9.99 (Fees) = $189.99. You now have $310.01 to spend on other shares.
Now that you have entered this stock, the site lets you monitor your stock as often as you like. Mess with the tabs, see what they show you, experiment. You might want to keep track weekly on your own spreadsheet.
That was the easy part. Now comes the hard part. When should I sell? There is an old saying in Investing: “Bulls and Bears make money, but Pigs get slaughtered.” I can personally attest to the truth of the saying. You will go crazy trying to find, and sell, at the peak. What do you do instead? Set limits. Two high limits and a low limit. I use 20% and 40% as my high limits and 15% as my low limit. If the stock goes up 20% I watch it like a hawk. If it looks like it will keep going up, I wait. If it reaches 40% I put in a sell order, and still watch it like a hawk.
Do I sometimes sell too soon? Yes. It’s the pig thing. To put it into perspective, when was the last time your Savings account paid you 40% interest? If you can increase your investment 20% a year, you double your money every four years. The 15% loss limit is exactly that. Small stocks can go down 20% in a day. Always limit your losses. I still struggle with this rule to this day. No emotions just use the numbers.
As you “Practice like it’s real” for the next six months to a year, you will learn a ton. You will also hopefully develop the psychology that has to go with successful investing. More later.
Eric Tippelt is a full time professor of electrical automation at Loyalist College in Belleville. He has been studying money and finance since 2004 when he began his online trading activities. Eric writes about Micro Investing ($500.00 to $1,000), because there is very little information out there on how to invest at that level.