 |
Switching bank accounts may be easier than you think Read our tips if you are thinking about switching bank accounts. |
You may have seen advertisements for computer programs promising to help you invest or trade on the sharemarket. Some programs suggest that you can make lots of money through active share trading - you need to be very wary about such claims. Further, some of these programs may not be good value for money, and they do not suit everyone's needs. Here are some tips to help you decide whether you need a trading program and to save you money if you do decide to buy.
The 4 steps we recommend are:
1. work out your investment needs and whether you need a computer trading program
2. learn the basics of the share or futures markets before deciding to buy
3. if you still want a trading program, find out what the program does before purchase
4. shop around for good value and reputable providers
Step 1 Do you need a software trading program?
Before you start looking, work out what you want to achieve with your investments and how soon you want to achieve it.
You may plan to be a long term investor who holds much the same shares for many years, provided that they perform well. You are therefore unlikely to need such software. You may plan to run a business as a share trader who buys and sells frequently, in which case you may wish to consider trading software. Work out your budget. What sort of return do you want? What risks are you willing to take that you may lose some or all of it?
Step 2 Learn the sharemarket basics
Find out about shares and the market before you spend a lot of money on fancy tools you may never use.
Imagine if a friend suddenly decided to be a carpenter and told you he was going to spend $15,000 on new tools, before he had even tried to make a bread board. You would probably think it was very odd to spend so much money before he found out whether he had any skills, knowledge or natural ability.
The same goes for spending money on investment tools, like computer programs, without understanding the basics of investing or trading first. Ask a bookshop or library for good investment books, magazines and internet sites that explain the fundamentals. The Australian Securities Exchange runs courses on investing in shares. Licensed financial advisers or stockbrokers can also help.
You can then decide if you really need to buy a program. You may well be better off not actively trading at all and sticking to longer term investments. Many active retail traders fail to outperform the average return of the stockmarket over time. Day trading in particular is a high risk, stressful and time consuming activity. If you still want to trade, you might be better off using a broker's advice or your own research.
Step 3 Find out what the program offers
Be realistic.
No-one has ever found a foolproof system to make money on the stock market. No piece of computer software can make you get rich quick - so don't believe inflated claims of success. Even the most experienced professional traders and investors make losses. Some of Australia's major investment managers, stockbrokers and institutions have millions of dollars worth of computer power to help them invest. They still make losing trades as well as profitable ones.
Warning
Beware of promoters of such software who:
1. promise high returns over a short period
2. do not disclose the potential losses and risks of actively trading shares or futures
3. claim the program will make you a successful trader
4. provide examples of large profits made by investors in the past as a result of using the program or
5. overseas promoters/vendors who promote trading software for sale.
Understand the type of program
Generally, there are two types of programs:
1. Programs that help you manage your shares - these are generally not trading programs
2. Programs that tell you when and what to buy and sell - these are trading programs
Programs that help you manage your shares may suit both long term investors and traders. They can help record purchases and sales, dividends received, keep track of investments and help with tax. Some programs show how your shares have performed, and may also include information about company earnings, balance sheets and cashflows.
Programs that give you advice on buying and selling are probably more useful for active traders, because these programs usually look at short term movements in share prices. Long term investors, interested in returns over three to five years, usually find weekly or monthly price movements irrelevant.
Advice from 'tool boxes' and 'black boxes'
Programs that give you advice rely on reasoning built into the computer program.
Programs called 'tool boxes' or 'white boxes' tell you what this reasoning is. You may even be able to change the reasoning yourself and set up your own trading rules. The program is designed to help make your decisions more quickly.
Other programs are called 'black boxes' because they do not tell you how they work out their advice. If you rely on these programs, you put complete faith and trust in the skill and reliability of the programmers. If their reasoning is wrong or if their program is unreliable, you won't know and you will have no control. You will also not be able to properly assess the level of risk in the program, and whether it matches your own risk tolerance.
Buy black box programs only from people who hold an ASIC licence or who are properly authorised to represent someone licensed to give advice. An ASIC licence means that the people involved have met basic standards, including membership of a complaints resolution scheme.
You can find out if someone is a licensed adviser or an authorised representative by running a safety check through our databases. Search our databases.
Step 4 Shop around
Shop around to compare products. At the moment, there are some programs costing thousands of dollars that may not be good value for money. A program costing only a couple of hundred dollars may be much better for you. And for experienced investors some popular charting tools may be available on the internet at little or no cost.
Test the program
Test the program before buying. Insist on a full demonstration. See if you can test it at home over a couple of weeks doing imaginary trades. Otherwise, ask for a complete list of all trades the system has recommended over the past month or two. (A few successes do not provide reliable evidence of the trading success of the program, since there may have been losses on other trades.) Find out if anyone has independently tested the program in real market conditions.
Ask around
Read reviews on the program in computer and investment magazines or on websites such as the Australian Technical Analysts Association site. Ask your financial adviser about different products.
More information
Get rich quick trading courses (spread betting)
Read FIDO's tips on trading software
Lots of information about investing in shares
