For 30 years For Dummies books have been transforming complex concepts into the easy-to-understand, and Booktopia is spending this month celebrating this amazing book series. Today, we have James Dunn, author of Getting Started in Shares for Dummies, on the blog to give us a brief introduction to the sometimes confusing but always exciting world of the sharemarket. Read on!
James Dunn
The sharemarket, over long periods of time, is one of the most reliable generators of wealth available to the individual investor. But its double life is shown in the fact that it can also be treated as a casino by those looking for quick gains. That is the nature of a market that is open five days a week, in which any listed company’s shares are up for sale at any time, and in which buyers and sellers hold different views on company prospects at any time – and can click ‘buy’ or ‘sell’ at any time.
The sharemarket is always a very interesting place, with thousands of stories being told, and all of human nature on display – greed, fear, optimism and despair. It continues to throw up amazing situations, from the rise of Tesla to become the world’s most valuable car maker to, in Australia, Afterpay skyrocketing from a $1 float in 2015 to a share price above $150 in just six years.
Early in 2021 came a situation I’d never seen before, when US video game retailer GameStop came under short-selling attack from sharemarket players, including ‘hedge’ funds (which can be ultra-aggressive funds able to deploy money quickly, with leverage, to make lots of money quickly.) “Short-selling” means these players were borrowing GameStop shares to sell them, expecting the share price to go down, such that when they needed to buy the shares to settle the initial sale, they paid less than what they received for the sale. That’s how short-selling works – it’s the reverse of buying shares. It’s risky, because if you get it wrong, and the share price rises, by the time you buy the shares to settle your sale transaction, you’ll lose money.
For these reasons, short-selling is usually done only by very experienced sharemarket participants – like hedge funds.
What short-sellers fear is when the share price of the stock they have sold-short rises. In the case of GameStop, that happened – but not by chance.
On an Internet forum on the social news website Reddit, some savvy investors looked at GameStop and felt that the hedge funds had got it wrong – that GameStop’s share price was actually likely to rise. This particular forum is known for discussion of high-risk stock picks and plays and in January, a discussion started around GameStop, with some members of the group saying they had bought the stock and others should too.
‘What has not been democratised is the knowledge and the experience to know how to use the sharemarket effectively so as to maximise your chances of making money.’
Over the following days, GameStop’s price began to rise, and a kind of “sticking it to the hedge funds” mentality grew. The rise in the price caused some hedge funds big losses, and big gains for some of the “Redditors.” Some brokers – including the so-called “free” trading platform Robinhood – stopped allowing (or restricted) purchases of GameStop and other stocks caught up in the frenzy. For a while, a mood grew of the “little guys” getting one over on the titans of Wall Street.
When the dust had settled, yes, some hedge funds had lost money – but so had plenty of retail investors who got sucked into the action.
It was yet another reminder that the advent of online trading and cheap (even no-commission) trading platforms have democratised access to the sharemarket totally – anyone with an internet connection and a smartphone can trade on the market at any time, and get involved in any stock.
But the GameStop frenzy was also a salient reminder that, while millions of new investors have been able to get involved in the sharemarket around the world, easily and cheaply, what has not been democratised is the knowledge and the experience to know how to use the sharemarket effectively so as to maximise your chances of making money, not losing it.
That is what inspired me to write Getting Started in Shares for Dummies in the first place – the thought that by reading my book, a potential investor will at least get to know how the market works, and how best to make it work for you, rather than against you. Especially for first-time investors!
—Getting Started in Shares for Dummies by James Dunn (Wiley) is out now.
Getting Started in Shares for Dummies
Your up-to-the-minute guide to share investing
If you've ever wondered whether you're missing out by not investing in shares, here's your chance to find out, and do it with confidence. Experienced financial journalist and commentator James Dunn shows you exactly what to do, how to do it, and what you should never, ever do. Understand how the stock market operates and benefit from the advice of some legendary investors. You'll learn to analyse the share market, track trends, develop an investment strategy, assess your risk, choose a broker, understand tax implications, and so much more...
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