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INVESTOR’S GUIDE
The New Investor’s Toolbox Using the right tools to fine tune your financial future
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In an increasingly competitive world, we believe it’s quality of thinking that will give you the edge – an idea that opens new doors, a technique that solves a problem, or an insight that simply makes sense of it all. The more you know, the smarter and faster you can go. That’s why we work with the best minds in business and finance to bring cutting-edge thinking and best learning practice to a global market. Under a range of leading imprints, including Financial Times Prentice Hall, we create world-class print publications and electronic products bringing our readers knowledge, skills and understanding which can be applied whether studying or at work. To find out more about Pearson Education publications, or tell us about the books you’d like to find, you can visit us at www.pearsoned.co.uk
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INVESTOR’S GUIDE
The New Investor’s Toolbox Using the right tools to fine tune your financial future HENRY HARINGTON and ALEX HOAR
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PEARSON EDUCATION LIMITED Head Office: Edinburgh Gate Harlow CM20 2JE Tel: +44 (0)1279 623623 Fax: +44 (0)1279 431059 Website: www.pearsoned.co.uk First published in Great Britain in 2004 © Pearson Education Limited 2004 The right of Henry Harington and Alex Hoar to be identified as Authors of this Work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 0 273 66308 9 British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1P 0LP. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers. 10 9 8 7 6 5 4 3 2 1 Typeset by 70 in Palatino Printed and bound in Great Britain by Bell & Bain Ltd, Glasgow The Publishers’ policy is to use paper manufactured from sustainable forests.
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Contents About the authors Introduction
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Understanding risk Diving under the duvet The importance of foundations Committing yourself Summary
17 19 19 28 29
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Short selling It’s not cricket Adding more spice to the wager Understand short selling in stages Short selling basics Returning to the cricket analogy What goes on behind the scences Caught short Short selling and short-term trading Short selling on UK stocks Summary
31 33 33 34 34 35 36 37 37 38 38
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Charting Mapping your way through charts Charting versus technical analysis Don’t discount charts Charting equipment Construction of charts – three types What charting method should you use? Charting timeframes How to read charts The basics of charting Technical indicators Further education on technical analysis and charting Summary
39 41 41 42 42 43 45 46 46 46 60 60 61 v
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Contents
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Stop losses – how to win by losing Cut your losses and let y