DIY Investors Need Training To Avoid Losses

There’s no doubt that the pandemic has motivated thousands more people, including in Canada, to try trading, often for the first time.

The ping-ponging of the stock market, along with increased time spent at home or unemployed, has resulted in an incredible amount of growth for online trading platforms.

Many financial commentators have pointed out studies suggesting that many or most of these new day traders will lose money, at least partly as a result of their inexperience.

In that Forbes article, Simon Moore likens daily trading to visiting the casino every day. The house has the advantage. If you roll the dice every day, you increase costs and risks that usually result in overall losses.

That’s why it’s so important for interested traders to get an education on the basics of trading and the stock market.

It’s tempting to jump without looking when you see so many companies experiencing sudden and unexpected highs in the marketplace — the ongoing GameStop fiasco is a clear example of this. But stock market experts said investing in sudden changes to a company’s stocks is not always the smart choice.

Matt Choi of Certus Trading is a self-taught trader with more than 17 years of trading experience. Choi began trading in college, making mistakes along the way to a better understanding of the market.

He launched Certus Trading to offer courses that help traders advance their skills.

“You have to really take an interest in the industry,” Choi said. “You have to be willing to learn about its history, and how it has evolved over time.  Once you have a good understanding, you can start honing in on a few things that work best for you. You can start by focusing on one or two asset classes. You start to expand and then eventually come back to the things that you’re most passionate about.”

Wealthsimple Trade launched in March 2019 as a response to stock-trading apps like Robinhood in the US. This new stock-trading model became popular with first-time investors because of the $0 commission, making it easy for those with less money to still participate in the stock market. The average age of investors on Wealthsimple is 30, with most of these new traders focused on companies like Tesla, Apple and Shopify. Wealthsimple Trade said new users have increased by 80 percent during the latter months of 2020.

Tracey Bissett, a Toronto financial analyst, told Advisor’s Edge that first-time investors need to consider what goals they’re trying to achieve and what that timeline looks like. That could be a down-payment on a house or going back to school or saving for retirement.

For those goals, Bissett said new investors should choose stocks with a small range of returns to reduce risk. When trying to decide what stocks have an acceptable level of risk, Bissett said investors should use only reputable sources and try to gauge how reliably the company is making profits.

Even Wealthsimple is trying to encourage its users to invest with a bit more caution. The company suggests users trade less than 1 percent of their savings, understand the risks before investing, and focus on savings and debt elimination as much as investing.

“Before deciding where to invest, you’ll need to first assess your personal risk tolerance,” according to Wealthsimple’s  Investing 101: Basics for Beginners. “This is a fancy way of saying how much of your investment you can really afford to lose. If you need money for next month’s rent, you have a very low-risk tolerance.”