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Mining shares : Gambling or a solid investment

Posted on 17 June 2015

Mining shares are high risk investments especially when they have nothing in the ground. Even if they found something, the next question is the quantity and also the cost of digging it out. Buying these shares just from the hearsay of a friend's friend or some unfounded rumour could mean impulse buying. Greed and impatience play a big role in trustees making such a gamble.

Most mining shares lack liquidity. They are easy to buy. But very difficult to offload. Most have extremely shallow market depth. For example the last trading price of ZZZ shares is $0.05 but the buy and sell spread could be $0.07 to $0.02 respectively. It would be easy to go and buy at $0.07 but if you wanted to sell it quickly, you could be forced to sell at $0.02. This is a loss of ($0.02-$0.07) / $0.07  x 100% = -71.4% !

Mining shares are definitely not for amateur share traders. Even experienced traders should be wary.

There are crooks engaged in PUMP-AND-DUMP sharetrading tactics. They talk up a particular mining share and spread a bit of rumour. Day-traders come in and drive the prices up. Trustees get taken over by greed and buy in. Three or four weeks later the share price plummets 50% to 60%. Massive losses incurred by the SMSF.

Options and CFD trading in mining shares amplify the losses 10 to 1000 times. Don't even go near options and CFDs. There are Trading platforms/Companies that provide CFD/Options software who trade against their clients! They have the access to the clients' portfolio data, know the contract expiry dates and trade against them. This is highly illegal and unethical but difficult for ASIC to catch. Then you have big financial institutions dealing with Dark Pools and high-speed, low volume trading (High Frequency Trading) that manipulate market prices of ordinary shares. Indirectly affecting the prices of CFDs and options. It's a no-win situation for ordinary share investors like you and me.

My advise is to stick to the ASX Top 100 and your fund should do well. Share investment is a medium to long term prospect. Winners are those who can hold their shares for 3 to 5 years.

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Jimmy CK Chong is a Chartered Accountant & registered tax agent. Contact him via:
Tel : 08 9440 0871
Mob : 0433 117 110
Email :

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