By: Laura Ramsay

  Mrs. D and her husband were earning a combined income of $60,000 when a $200,000 settlement for a workplace injury led them to the stock market. An aggressive broker put their money into high risk products, then traded frequently, earning substantial commissions. As their losses mounted they mortgaged their house in an attempt to earn back what they'd lost. Within a couple of years everything was gone. Mr. and Mrs. D. blame the broker for losing their money on high risk investments. But some of their problems were self-imposed, says Adam Hennick, of National Bank Financial. For starters, they didn't clearly spell out their unwillingness to make risky investments. Then they didn't challenge or fire the broker when he continued to put their money into unsuitable products and make frequent trades.
 

Beginners should start by investing in products and services they like, and staying with those for a while

  "My gut instinct would have said 'something's not right here" he says. "You've got to state your concerns, your risk tolerance and your understanding of risk" and then act on it. As more people jump into the stock market, horror stories like Mr. and Mrs. D's are likely to increase. Here are some tips and traps to be aware of if you're thinking of venturing into the stock market:

• Beginners should start by picking a couple of products or services they like, and invest in those, says Nancy Woods, investment advisor with Nesbitt Burns in North York. The things you like about that company will likely be appreciated by others as well. "At least it gives you a lead-in to something tangible you're familiar with".
• Don't listen to tips from your friends. "They're always going to tell you about money they've made, they're not going to tell you about the money they've lost," says Woods.
• If you're prepared to do the research, self-trading is an option. If you don't have the time or inclination to do the necessary background work, hire a professional broker.
• To find a broker, ask people you respect who they use. As with doctors and hairdressers, word of mouth is the best advertising. Once you meet, trust your instincts. "You've got to feel you could come to trust this person," says Hennick. "I really think the personalities have to match up."

Remember that mutual funds are not risk-free investments, and that there are sizable fees attached

• Decide how much you're willing to lose before you start trading. Your risk tolerance should be detailed at your first meeting with a prospective broker on a 'new account' form. This statement outlines your risk tolerance as well as your financial position. It protects both you and your broker by documenting the degree of caution - or aggression - you're comfortable with. "It's most important that your criteria gets set out at the beginning," says Hennick.
• Establish a target price that you want to sell your stock at. When it reaches that price, sell half your holdings. "Especially if a stock doubles over time, then you sell off half of it. Take your original capital off the table and just invest with the money that is left," says Woods. "If nothing fundamentally has changed for the company" there's no reason to sell all your stock.
• Once you've sold, don't rush out to re-invest in other stocks. "Sometimes when people sell they feel that they have to buy right away. Sit on the cash, sometimes you'll fare better, especially if there's a temporary moment when the market downturns," says Woods.
• Remember that mutual funds are not risk-free investments and carry steep fees like the 2.5 per cent annual management fees charged against total assets, as well as other fees hidden behind deferred sales commissions "You don't think you're paying a fee on mutual funds but you're getting ripped off two different ways," because you pay higher fees every year on a deferred load basis, says Hennick.