This article looks at some of the things you might be caught out by as a new investor on the stock market. Unfortunately, these things may not be obvious for the newbie investor.
1. Real-time buying and selling (or the lack of it)
Stock prices should be quoted in real time irrespective of whether you’re looking at the prices on Google or your trading platform’s website. Unfortunately, that is not always the case.
At the beginning, I would notice that one of my stocks had risen in price, and in a fit of excitement, I’d sell the entire holding. Even as a beginner, I knew that the stock prices can be rounded up or down – particularly with penny stocks. So, I always ‘check the receipt’ (or in this case, check the ‘sell certificate’). And quite often, to my horror, I’d see I’ve somehow made a loss.
But how is that possible when I definitely saw the share price rise? Not only that, the trading platform I was using (Freetrade) wasn’t even charging a commission! (…and of course, I had already researched all the shares that didn’t attract any Stamp Duty, so I knew tax could not have tipped me into a loss).
As it turned out, Freetrade’s quote price did not align with Google’s (or anyone else’s price for that matter). The prices given by Freetrade were well expired. This means the app would show one price, but execute the trade at a different price. This takes some getting used to.
Indeed, Freetrade’s own forum-goers advise people to check the price on another trading platform app to ascertain the price that Freetrade will execute at. Crazy!
To avoid the pain, execute trades with a very small monetary value and test out the quote price and execution price first. You'll eventually figure it out.
2. Mistaken purchases
This might sound silly, but it’s possible to mistakenly buy the wrong stock. There are a few good reasons for this:
A. Two ticker symbols are very similar
A ticker is basically a shortened name of a company that trades on the stock market. Tickers can be confusing at first, but once you get used to it, you’ll love them. To bring this point home, consider the name ‘Bank of New York Mellon Corporation’. Imagine having to type that every time you wanted to check the share price. That’s 35 key strokes in all! Luckily, investors can quickly and conveniently type ‘BK’ to find its share price.
But with this convenience comes the small matter of investors potentially mistakenly buying shares - some tickers are very similar.
Zoom, the video calling software, has benefited from the pandemic significantly, as reflected by a 50% rise in its share price. In turn, Zoom Technologies (which uses the ticker ‘ZOOM’), a relatively small technology company from China benefited even more in percentage terms (240% to be precise). Investors were buying shares in Zoom Technologies thinking it was Zoom the video calling company!
Make sure you’ve got the right ticker, folks.
B. One-click purchases
Some platforms require confirming a stock purchase by entering a pin number. Others, meanwhile, allow one click purchases (or one tap on a phone). This gives rise to the possibility of mistaken purchases.
3. Confusing UK and US stock pricing units
This is an interesting one. The good thing is you can’t really get caught out by it more than once. Let me show you what I mean. Observe these two stocks below:
Would you say one share in Kingfisher and one share in Facebook is worth roughly the same?
(Yes, I know the currency issue means it won't be equal, but for the sake of simplicity, let us assume 1p = 1 cent, and no forex fees exist).
The stock on the left is Britain’s Kingfisher – the owner of B & Q. The stock on the right is a website-based business called Facebook. Perhaps you've heard of it.
Hopefully you said they are not worth the same amount of money per share.
If there really were no currency exchange related price consideratons, the Facebook shares would be worth around 100 time more than the Kingfisher shares.
This is because in the UK stock markets, share prices are quoted pennies. But in the US, prices are quoted in dollars. So, if the price of a share in the USA says ‘10’ (£10/ £7.32) next to it, it’s still more expensive than a UK share that says ‘500’ (£5/ $6.32) next to it. Or to use the Kingfisher V Facebook example, shares in Kingfisher are worth 262.4p (£2.62) and shares in Facebook are worth $261.40. Quite a difference, that.
4. Money settlement time
It is well known that the value of shares can rise, fall or remain the same, unlike, say, property which seems to rise all the time.
One reason why people are attracted to stocks is because it is a lot more liquid than property, but even then you should be aware of settlement times. This is the time it takes from the point you sell your shares, to the point where you can withdraw the money from your trading account to your bank account (which may take an additional few days).
So, if you’re in a hurry to make a purchase with the proceeds of your shares sale, you might want to factor this in.
Typically, it should take 2-4 days. However, to be on the safe side, allow a full week (just in case one of those days falls on a bank holiday, etc.).
5. Rejected stock sale
This is something beginner investors may face a lot more than experienced investors owing to their reliance of free trading platforms. You may find that you try to sell a stock then get a message saying the sale has ben rejected. This can happen for a number of reasons (such as a technical glitch or the market maker unable to buy the shares off you).
This only becomes a big problem if:
A) You urgently need to release the money for some sort of emergency.
B) Your stock is collapsing and you’re trying to salvage whatever money you can from your investment.
The good news is that in the grand scheme of things, this is quite rare. I can probably count how many times a stock sale (or purchase) has been rejected on the fingers of my two hands. I couldn’t tell you how many trades I have executed in that time though, but I do remember that when I requested a trading statement for my trades, it ran to 14 pages.
Here’s what a rejected trade might look like:
6. Entering into a CFD trade
The above points are relatively mild compared to this one.
Trading platforms make money off investors in several ways (which is a topic for another article). But by far, the most lucrative way is by offering CFDs. This has been explained in one or two other articles so it will not be explained here.
Whether by design or coincidence, a lot of investors find themselves trading CFDs. Some are, of course, willing traders of CFDs. Others, meanwhile, may feel they have been duped into a CFD transaction. It is well established that engaging in CFD transactions are haram.
To carry on with the theme of ‘design or coincidence’, let us consider these two images.
Here's the first one:
And here's the second one:
You may or may not have noticed any difference between the two images initially. But one thing is for certain: both the images are very similar.
Trading platforms will probably say they need to keep the design consistent and that's why both the regular trading transaction and a CFD transaction option looks almost the same at the point of execution.
So, what should you look out for?
If you're looking to buy only (which is the only halal transaction type here), look out for clues indicating it's a strightforward purchase. For example, you may see terms like 'buy' or 'you are buying the underlying asset'.
How can you tell you're being offered a CFD trade (which are always haram)?
7. Using leverage
This one is similar to point six. If you use leverage, you’re probably going to end up paying interest. You may also make huge losses if the price of your share(s) goes down.
Each platform will do it in their own way, but there are some ways to recognise when leverage is being offered to you. Look out for the word 'leverage' and also look out for 'X' followed by a number.
I hope this article will help you avoid some mistakes that beginners commonly make. If you feel there's more to learn and you're not quite ready to start trading on the stock market, perhaps my free 30 Day Trading Programme could help you gain the knowledge and confidence to start investing.
Further reading:
https://www.ft.com/content/98635c63-b4ab-49a3-9c18-1de6819d6305
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