How to Make Money in the Sharemarket

By: Joseph Sgro

How to Make Money in the Sharemarket

My favourite game is playing the sharemarket and I will admit to you from the start it's not always money in your bank account - why? Simply because it's a game where the one who who knows the most makes the money.

If you want to join me then start your education now! Learn how, do the training and master your emotions you you will do well.

First Rule

Don't trust anyone to make money for you.
No one cares about your money the way you do. Advisors in most cases are just sales people who need to get clients so that they can pay their bills. If you lose or win, it's nothing to them - they hope they will still get to keep their jobs. We all want advice and we all ask the opinions of others, but don't become dependent on someone solving your problems - you are alone! The sooner you take full responsibility the better.

The people who make excellent returns are those that see trading as a business and realize that they will always be a pupil who needs to keep learning, be self-motivated and resilient, because losing at some stage is inevitable.

There are going to be more people that lose money than make money. I have had strings of losses, where position after position has had to be closed. Now you don't need that to happen too many times to wipe out your capital. This is the reason for keeping your positions small. You must decide how much time you will be willing to invest to learn how to make your fortune and keep it. The less time you're willing to devote to learning, the less money you should put into the sharemarket.

The gambler will eventually give his winnings back to the house because they do not have a plan and trading rules which help them develop self-discipline. The most important quality to develop if you seriously wish to be successful in the sharemarket is self-discipline. Although this is easy to write in words I assure you that developing personal discipline is very hard and to carry out actions without involving emotion can be next to impossible. We are often ruled by emotion and we hate to admit we have made a loss - thus, often we won't do what we should to rescue our remaining capital. This is
how a little loss becomes a big loss over time.

Master Yourself
Your emotions will help you lose money.  The more you think with your emotions and the more you make decisions with your emotions, the more you will lose.

NO ONE CAN PREDICT WHAT WILL HAPPEN IN THE MARKET!

If anyone can predict with any accuracy it won't be you and if you must predict what is going to happen, don't put any money on your bet. Next, if your broker could predict what was going to happen he/she would not be a broker - they would be living the life of Riley. If the money is coming out of the market then for god's sake take notice. This may be as close as you get to insider trading.

The stockmarket is like a sport. Everyone wants to see the great players and witness all the action, but not everyone  is going to win the game. It is up to you to learn how to play the game. You need to learn the rules and learn the tactics and strategies to help you score more goals.

There are many different plays you can make in the market, but learning the less risky plays and those that reduce risk will make you more money.

Less risky to some......using options to make money

Examples might include:

1. Writing puts when the market is going up instead of buying the stock. If you're exercised then you can decide whether to buy the stock or act earlier to prevent the exercise by closing out your put position when the put price drops (buy the same put series and close it out).

2. Writing calls over your shares when it looks like the stock price is ready to fall.

3. Buy calls or puts depending on which way the market is going. Up market might indicate buying a call to cature the upside. A falling market may indicate buying a put to capture the rising value created by people buying protection.

The first strategy many people will see as too risky, but it really depends on your level of education in options, whether you can handle the risk and how much spare cash you have to meet your obligation if your puts are exercised. If the total cost of exercise is $50 000 and you have the money then in the case you do get exercised you will be able to buy the shares.

Get protection for your shares

Buy Puts
Let's say you protect your position by buying a put, then if
the price drops you will cap your loss, or alternatively, you
could sell the put/s, which may result in a profit and thus
make up for any lost value in the share. Covering your position
may be an on-going requirement. There will always be a price to
pay - that's life!

Making money buying puts

Write Puts
If you write puts then you'll be obliged to buy the stock in
the event you are exercised and so having sufficient cash is
essential. You can also buy another series to cap your
potential loss to the spread between the two series.

If you wrote $10.00 puts and bought $9.50 puts your loss would
be partly covered by having that cover if the price drifted
lower.

So we can make what looks risky, less risky, by knowing more
about what is possible and then choosing our exit strategy. If
I am exercised my contingency plan might be to write calls over
my new shares and if I preferred, I could go back to put
writing, by letting myself be exercised.

If I wanted to keep the shares then I would write calls that
are further out of the money. I can even buy calls in a
different series so that in the case the share price goes up I
capture some of the increase, or I can cancel the contract by
buying calls in the same series.

During May 2002 I used this same strategy with NCP. I wrote
puts at $12.50. I watched the share go down to $9.68. I let
myself be exercised and met my obligation by paying
$12.50/share - risky? You bet, because all the worst conditions
for put writing came together in June 2002, the month I wrote
puts.

It fell to $8.44. NCP makes up 10% of the Australian All Ordinary Index,
so you could expect such an important stock will get serious
attention. However at the time big media companies were not
the flavour of the month - all the flavours had turned sour!

Following the purchase of the stock I wrote covered calls.
There is nothing wrong with the strategy, but timing is your
most important variable - thus a contigency plan is required.
Keep in mind that 1 month in the market is a long time and 3
months is an eternity. Things can change very quickly from
panic to ecstacy for no apparent reason. Someone always raises
their hand with an explanation to satisfy the crowd - wouldn't
we be disappointed if someone couldn't tell us. I think
we'd probably get very worried!

Writing calls is a good idea when you think the stock price
will fall. My contingency in the event I was exercised was to
write calls and make up the difference I had lost - I didn't
intend buying back the calls, as I felt there was little risk
of losing the stock because the $10.50 level would remain out
of the money.

The resulting action suggested that a better plan would have
been to buy/write regularly - buy the calls back sheep(cheap)
and write deer(expensive). Waiting first for the stock to peak
then writing the call.

I could have closed out my contract by purchasing puts in the
same series. I could have bought puts in another exercise price
series to cap my loss. I chose a different way and regretted my
choice. Holding the stock was not the easiest choice I could
have made and in fact it held me back from making a lot more money.

Once I had the stock I had to protect it. If I then sold the
protection I could have found the stock slipping further in
value, so I kept the protection in place and missed the profit
as the stock moved back up. So even though I inially lost by
having been exercised I lost more by not being in a position
to be more flexible. A further complication was my stock was
purchased with a margin loan.

What should I have done?

I could have sold the protection , made a profit and then
looked at buying the same protection cheaper. I could have
done this at least 4 times in 4 months.

This brings us to the topic of increasing the flexibility of
our thinking.

If you make money only in one direction you will reduce your
trading results drastically. The market does not always go up!
Sometimes it goes down or moves sideways. We all need to be on the right side of the market. Believe me
the alternative is no fun!

Money Management
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