Unless you have been living in a cave for the last two months you could have failed to notice the credit crunch and subsequent financial nightmare that erupted in America and the resulting disaster and fallout that spread across the mortgage lending industry over here in the UK.
Panic set in and savers for the first time in centuries staged a bank run! As we saw queues of worried savers standing outside the Northern Rock in the Autumnal air, demanding the return of their hard-earned savings.
What happened to the share price of Northern Rock itself? Well naturally, it tumbled and it did it very fast! Savers panicked and investors pulled out from a company which uses money from a now cash-strapped money market. As you might imagine - the chart looked reminiscent of 9/11.
However there is always a group of private investors who think they can outsmart the market. Take five minutes to log onto any web discussion forum on "stock market investing" and you will see hundreds of investors banding reasons around as to why they should now buy this very undervalued and high opportunity stock - as it has fallen from 6.50 to £4.50. Of course, they jump in, scooping up ten thousand pounds worth of stock at, a very princely price of £4.50 a share.
What happened the next day?
The stock shuddered to an eye-watering £2.82 than to national disbelief £1.70- ouch! Unsurprisingly, the bulletin board fell silent - and remained that way for the next three weeks.
This happens all the time, investors think they can outsmart the market. They think they must come up with novel or interesting ideas All too often, these ideas end in painful experiences.
Why do we actually think we have to outsmart the market, is it the Hollywood that has us to believe there is a dark group of savvy individuals, much like Gordon Gecko who toil away relentlessly in ivory towers of investment banks hatching clever schemes to constantly outsmart the market? - possibly.
However, most of the madness stems from our psychology. When markets are moving in predictable, relatively boring patterns which offer safe investments with decent up side - we do nothing!
In very much the same way gamblers become seduced by the flashing lights and hypnotic sound patterns from the gaming machines in pubs and casinos. Novice investors are also seduced by the frenzied movement of excited buying and selling of a particular stock.
It is the sub-conscious part of our mind which is responsible for the decisions and ultimately the actions we take. What sub- conscious triggers, have our intrepid investors diving for the phone to their brokers?
It's generally fear of missing out. Meaning if the stock is moving fast, and everybody is talking about it our subconscious focuses on the pain of missing out. Being fight or flight creatures -Pain is generally a stronger motivator for our subconscious actions than pleasure. And it's the fear of not getting in on an opportunity that causes us to take action.
Unfortunately, when we say, the stock is moving generally it is too late. It's already moved and therefore it is time to move on.
Trading is all about understanding the reward and the risk a particular opportunity offers us. The primary question that most people asked when they're about to place the trade is "how much money can I make? "
The real question, they should be asking is "How much money can I afford to lose ?"
Trading activity has a ballooned in the last five years. Private investors these days can access the stock market with as little as £500. It means nowadays, you can bet whether you think stocks, are likely to rise or fall - and the profits you collect ? Completely tax free.
I am often asked, how can this continue? Will we be able to trade tax-free forever? And the answer is most certainly yes, at least for the foreseeable future.
Why?
Given practically anybody with £500 can open a trading account and the nature of financial spread betting means that if you lose, the broker tends to win. Statistics today suggest over 80% of people lose when they start financially spread betting, particularly if they've had no professional training.
Therefore, if you were Alistair Darling would you rather tax lots of private individuals with small accounts and little winnings or would you rather tax, the colossal brokerages that are amassing huge corporate profits from this increased and excited dealing activity?
Over the last decade, Greg Secker has been an extremely successful trader and has served as a coach to the professional and private investment community.
