Three strategies you should avoid when investing in shares

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This week, ASIC released an article warning people of the common tactics used to get individuals to invest in shares. The article, Don't believe the hype, goes into three areas that are used to take advantage of retail investors.

I have voiced my concerns about these practices in the past, as they have little to do with clients profiting from good investment strategies and everything to do with the provider making money regardless of the outcome for the consumer.

If you want to build your wealth, then according to ASIC, you need to stay away from the following strategies.

three strategies to avoid when investing in shares

Pump and dump schemes, which occur on a daily basis in social media and online chat forums.

This practice involves someone purchasing shares in a company at a low price and then telling everyone else to buy in order to create a snowball effect that causes the price to rise significantly.

This is known as the one more fool theory, where a buyer hopes one more person will purchase at a higher price than them, so that they can sell and take their money.

Another strategy is the gamification of trading, which typically attracts younger investors who get caught out with applications on their devices that make buying and selling shares easy and fun. Essentially, it is intended to make investing more like a game than a well-thought-out investment strategy.

Copy trading is another strategy that ASIC warns investors to be careful of. It involves copying the trades of someone else using an automated trading software platform.

While this might seem attractive, I am sure most can see the concern with putting their future in the hands of a total stranger. Unfortunately, I have talked to many investors who have tried this and suffered severe losses or had their accounts wiped out.

According to ASIC, it's important that you don't fall prey to the promise of high returns when you are approached about these strategies and to understand what you are buying, so you recognise the risks.

While I appreciate the desire to gain financially without a lot of knowledge or having to put in a lot of effort seems very attractive, it tends to create a false sense of reality to the point that many ignore the inherent risks.

The best and worst performing sectors this week

The best performing sectors include Information Technology up more than 2% followed by Communication Services and Energy, which are both up more than 1%. The worst performing sectors include Utilities down more than 2% followed by Consumer Discretionary and Healthcare, which are both down more than 1%.

The best performers in the ASX/S&P top 100 stocks include Alumina up more than 11% followed by S32 up more than 10% and NextDC up more than 7%. The worst performing stocks include Altium down more than 10% followed by Wesfarmers down more than 7% while BHP Group and AGL Energy are both down more than 6%.

What's next for the Australian share market

This week the Australian stock market almost repeated the trend of the prior week given that it traded up early in the week before turning down late. This is a reminder that it's important to wait for confirmation of direction before making a decision.

In my previous report, I indicated that while the market was technically bullish, it is searching for a two-year high and if the All Ordinaries Index trades down this week, it may be starting its move down into the low that is expected in September or October.

Technically, the market has confirmed an up move this week, which may be a sign that the bulls have not finished with the current uptrend that started with the COVID low in March 2020.

As I continue to say, we need confirmation that a move is unfolding before we react, as the market could easily start to trade down next week into the low.

My suggestion right now is to wait until we have confirmation of a move in either direction and to remember that now is not the time to speculate.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.