Learning about online shares trading very quickly

July 19, 2009 8:11 AM

What is the fastest way to learn online shares trading very quickly?

Hi, investment newbie here!

I bought "Online Shares Investing FOR DUMMIES" :) and ready to sign up for a trading game or 2 using fake cash. I would like some tips on what investment paths or style I should take to learn quickest?

I suppose an analogy is like being able to drive unlimited cars on a race track and to maximise the opportunity to improve your driving skills you would try interesting things to learn about the dynamics of a car driving, as opposed to driving normally. I think playing it safe I won't learn as much... ?

Any other ideas or suggestions would also be appreciated. Thanks!

posted by gttommy to work & money (10 comments total)

Another analogy for you to consider would be playing online poker with fake money vs. real money. The game is entirely different when real money is on the line, and habits formed during fake money games can cost you.
posted by pravit at 8:42 AM on July 19

Are you talking about day trading, like through an account on etrade or something? If so, do it EXACTLY the same as you would if you were using a brokerage. The horror stories of people losing $50,000.00 in an afternoon chasing short-sells are pretty widespread.

I had a TD Waterhouse account for a while and did all my own buying and selling on line, but I made sure I was making reasonably safe long-bets, & I never churned on a day-by-day basis. I came out okay, bet eventually had to sell everything due to other financial problems not involving the stock market.

Churning is a sort of gambling not unlike poker at all, and there are going to be people out there more experienced than you, waiting to pounce on your green ass, so beware.
posted by Devils Rancher at 8:50 AM on July 19

I think you're approaching this wrong; I'd suggest asking yourself two questions.

First, what are your financial goals? And second, what is your tolerance for risk?

The answer to these two questions would naturally lead to different courses of action.

For example, if you are saving for retirement and have very little tolerance for risk (perhaps income is very limited or you are already approaching retirement age), then capital preservation is key. Trading in equities would be de-emphasised with fixed income favoured.

If you were just starting out working, and wanted to maximise gains over the next decade, perhaps to raise funds for the down payment on a home, then different asset classes and techniques (i.e., small caps using heavy margin) may be called for.

So a realistic answer to your query won't be realised until you can provide more informatoin

Finally, please don't be tempted to day trade; when I was in business school we read an academic paper looking at the US markets where fully 90% of day traders lost capital, another five percent broke even, another four percent had relatively modest returns and only one percent (perhaps less) had what we call surpanormal returns.

I can't cite a free source for that paper, but SSRN has a paper providing evidence that in Taiwan 80% of day traders lose money (a small number actually perform well, so I guess I'd ask - do you feel lucky?).

In Risk Management we have a metric called RAROC; Risk Adjusted Return on Capital, and day traders consistently demonstrate very low returns when risk is considered.
posted by Mutant at 9:06 AM on July 19 [7 favorites has favorites]

Mutant is absolutely correct; given the nature of hlthe question, I doubt his advice will be heeded.
posted by dfriedman at 9:41 AM on July 19

Virtual Stock Exchange will allow you to play about with some imaginary money using the real market for its data.

You asked "How can I learn the rules really quickly?" The problem, as Mutant points out, is that most of the sensible rule lists (one quick example) are very antagonistic to the notion of day trading which sites like Virtual Stock Exchange are pushing.
posted by rongorongo at 11:35 AM on July 19 [1 favorite has favorites]

The poster is in Australia, so U.S. specific sites (like E*Trade) probably won't be very helpful. I would imagine things are a little different there.


Keep in mind that even if you can make money on a virtual stock exchange, you might not be able to on a real one, because there are brokers fees that get taken out. so if you want to buy and then try to sell on a 0.5% increase, or something, it won't work because the profits would get eaten by broker's fees.
posted by delmoi at 1:50 PM on July 19

It's a common assignment in Australian accounting courses, so one place to look is online educational resources. My daughter had to do it with a fake $100,000 as part of her accounting course - interestingly enough, most of the class lost money even though they were doing all the "right" things.
posted by Lolie at 2:54 PM on July 19

Thanks for the advice everyone.

I do not see myself as becoming a day-trader as I'm sure there are better things to do then spend the whole day in front of a computer stressing. Plus I'm very likely to become cautiously conservative when real money is involved.

However if taking on this style of investing using a virtual account teaches more valuable lessons then I will try it.

Other than that, what types of shares, level of risks, indexes, industries, specific companies, online-stock-exchange-account-features... anything... would provide a broader experience and better overview of the wonders of online shares investing?

I guess I'm just trying to start at the top, so when I see what I like, if anything, I can then narrow down to it.

Yeah that was a lot to read, thank you if you got this far!
posted by gttommy at 5:57 PM on July 19

Oh one thing that would be fun (especially with pretend money) would be options trading. Options are basically contracts to buy or sell a stock at a certain price. Why would people do that? Well you can amplify or reduce your risk by buying them.

So Amazon.com's stock is $88 right now. Say you think it will be worth more then $115 in January. You could buy the stock at $88 right now, and make $22. Or you could buy a contract that gives you the option to buy an Amazon share for $110 for $3.30. So you pay $3.30 now, and then in January if you if the stock is worth less then $110, you don't do anything, and you're just out $3.30.

If, on the other hand the stock is worth MORE then $110, you buy it and and sell it right away. If it's worth $120, you will have made $6.70 per contract, doubling your money. And if it's $150, you would have made $36.7, multiplying your initial investment by eleven

It's not a good strategy for actual money, if you don't know what you're doing. But if you're just planning on playing on paper it could be fun. You have to think a lot more about what you're doing and it force you to actually think things through.
posted by delmoi at 9:43 AM on July 20

Oh and the other thing is that you can sell your options after buying them before they settle, so if you buy some January Amazon calls you can sell them again if the underlying stock goes up.

You can also get puts which give you the right to sell if you think the price is going down.

Again, not something to do with real money if you don't know what you're doing, but it could be fun on paper.
posted by delmoi at 9:46 AM on July 20