Stock trading offers the best chance to make huge returns in a short time. But not everyone strikes it rich in the stock market.
Successful investors and traders study the nuances of the stock market and how to buy and sell stocks.
As the first step towards investing in the stock exchange, seek educational content on how the stock market works. Make sure the materials offer unbiased content on the range of shares, different investment strategies, the payment process, the tax advice, and other relevant details. The additional cost for such information is well worth it to make informed trades. Rushing in blindly without knowledge of the basics is a sure-fire way to make mistakes, and lose money.
Types of Investment
There are different investments available in the stock market. Long-term trading is holding the stock for a long term, which usually means for a period of more than a few days. Short-term trading usually means day trading, or buying and selling the stock within the same day. Buying and selling the stock within a few days, for swing trading, also comes under the tactic of short-term trading. Swing trading is taking up short-term positions in anticipation of a price move.
Most short-term trades take place on low margins. To make meaningful profits, traders have to invest huge upfront capital. The interest cost for such capital, and the associated risks, make trading unviable for most traders. Options trading allows traders to trade in enormous volumes, with limited capital. An options contract gives the trader the right, with no obligation, to buy or sell the underlying stock, at a predetermined price, by a specific date. A call option contract allows the trader to buy a stock. A put option contract allows the trader the right to sell a stock. The trader makes a profit or loss, depending on the actual price movements compared to the price of the put or call option.
Long-term trading means buying shares for a long period. The investor expects to get dividends, stock splits, and enjoy capital appreciation. Investors may buy individual stocks and hold them in their stocks account for the long term. They may also make collective investments such as mutual funds.
Collective investment schemes allow two or more investors to pool their resources. Each member holds interest and shares risk and benefit in proportion to their investment. The best example of collective investment is mutual funds. Mutual fund managers leverage the collective wealth of subscribers to make trades. The volume of funds deposited with them makes it possible to influence the short-term movement of the market. Investors in mutual fund schemes can enjoy the benefits of stock market investment, without the hassles of active trade. They have to pay an entry commission or exit commission as fees. The fund managers may also retain a small portion of the corpus as administrative fees.
The ideal type of investing depends on risk tolerance. For instance, day trading is riskier compared to long-term investing. Trading in start-ups or small-cap stocks is riskier compared to trading in blue-chip stocks. But such risky stocks also offer the potential of huge returns. The right move depends on the trading strategies adopted. Seek the advice of an investment advisor before investing or trading. Investment advisors give their recommendations based on the risk profile of the individual.
Diversify the Picks
Select a few stocks to trade. Stock markets list thousands of shares. No trader can keep track of all the listed shares. It is equally foolhardy to trade without a plan, picking up any stock that catches the ear. Smart traders shortlist a basket of limited shares, and keep track of such shares.
When making long-term investments, diversify the shares. Include top picks from retail, construction, chemicals, automobiles, transportation, technology, consumer goods, and other growth sectors.
Diversifying the picks is relatively unimportant for day trading. Stock markets also list exchange-traded funds or ETFs. ETFs reflect the value of the underlying index or commodity. For instance, the value of a NASDAQ ETF mirrors the movement of the NASDAQ index. Likewise, the value of a gold ETF reflects the movement of gold prices. Trading in ETFs is an easy way for short-term traders to capture gains from the movement of an index.
Analyse the Shares
Before making investment decisions, subject each stock in the basket to analysis. The most common stock analysis covers fundamental and technical analysis.
Fundamental analysis focuses on the financials of the company. It covers aspects such as the profits made by the company, disclosures in the balance sheet, cash flow, the demand for the company’s products, and so on. Fundamental analysis is more relevant for long-term investing.
The technical analysis processes historical data of price movements, trading volumes, trends, and patterns. These insights shed light on how future trades will play out. Traders assume the worth of the stock as estimated in the fundamental analysis already reflects in the stock price. The intra-day movement in stock prices depends on the revelations unearthed in the technical analysis.
The gains from a stock come through earnings growth, which depends on the increase in profits and revenues in the balance sheet. These gains are reflected in the movement of key ratios such as book value, earnings per share, price-to-earnings ratio, and more. Such increases in stock values take time. The stock price also increases when the stock has growth potential. Such increases take place fast, and cause the stock prices to fluctuate by the minute. When the economic conditions favour the company’s products, there is a high likelihood of increased profits. Traders and investors become attracted to such stocks. The increasing volumes of a stock, as depicted in the technical analysis, are a sure indicator of interest building up on a stock. Traders prefer shares that have high volatility, which increases the chances of making good returns.
Seek Expert Advise
Success in stock markets depends on sound financial advice. Top brokers offer investment advice including exclusive stock lists. They release top-performing stock lists, prepared by their in-house research team.
However, do not depend on analyst opinions blindly. Analysts are also human, and ultimately make predictions. Even expert market analysts have made big mistakes in the past. Consider the track record of the analysts, and follow analysts who have got more calls right than wrong in the past.
Before investing in a stock, identify consensus price targets. Analysts give a price target for each stock, which is the price point at which the stock has a fair value. Such targets are, however, subjective. Consensus price targets consider the fair value of different experts and seek common ground, or average fair value. The theoretical price target, based on fundamental and technical analysis, may not always happen.
Seek real-time information. Stock prices move by the second. Frequent traders trade in big volumes, with low margins. It is important to get market updates live to carry out such trades successfully.
Many traders now toy with Algorithmic trades, opening and closing positions with the help of Artificial intelligence. But algorithmic trades worsen swings, and may leave the trader with huge losses. Many traders keep a stop loss of five percent, which algorithmic trades may cover in seconds.
Select a Robust Platform
After deciding on the investing strategy, and identifying the right stocks, it is time to make the trade. Trading in the stock exchange requires opening a trading account and a Demo account with any broker.
Traders now have the convenience of online trading, offered by most brokers. They can do the analysis and trade stocks from the comforts of their home or office, without visiting the stock exchange. Trading dashboards make it easy to monitor share prices and track stock positions. They also offer investing tools, which make it easy to place orders. Likewise, the sale of the share takes place seamlessly through a broker account, with all management done in the broker’s client area.
When approached professionally, stock market offers potential to make big profits. Each trading day offers infinite possibilities. Thorough research, sound strategy, and a seamless platform helps the trader make money.
Read more:
How To Buy And Sell Stocks – Diversify Your Portfolio With Stock Trading