There are fewer easier paths to wealth creation than through the stock market. Buying company shares and holding them until they appreciate in value or you are paid dividends over time which not only matches but surpasses your stake in the company has been one of the many ways investors have become rich, or even wealthy over time.
However, this method, more commonly called, ‘investing’, involves holding and having a long-term view of your stake in a company and riding the fluctuations concomitant with any stock market in the world until your stake begins to yield returns. Luckily, the skills required to become an investor of this kind typically require very little money, can be easily learned and simply involves perseverance over time.
Stock Market Trading, however, is a different kettle of fish, requiring totally new skills and mastered temperaments to succeed at. Unlike ‘investing’, ‘trading the market’ or ‘Speculating’ as it’s more commonly called, particularly should you wish to trade like a professional, involves greater analytic skillset with an intrepid demeanour, a higher risk appetite and a larger financial stake than what most long-term investors might be willing to speculate on. And, importantly, what the Japanese call ‘Dairokkan’, meaning sixth sense or clairvoyance.
It has been said that since 1926, through economic depressions and crashes, common stocks have still on the average returned 7% on a yearly basis to investors. This translates to an over 300, 000% (Three hundred thousand per cent) returns on investments in any publicly listed company over the near century-long period that might still be operational today. Had you decided to ‘trade the market’ over the same period however, some experts opine that your investment might have been worth more than 2,000,000% (Two million per cent), or even much more in certain cases.
No doubt, even though far riskier, ‘trading the market’ can be a profitable means of growing your wealth in both the short and long terms, should you have the knowledge and skills to understand what to do, when, and how. But the question is, do you?
In this article, we will delve into some of the markers you should be on the lookout for, skills you must have, and temperaments you should embrace to be able to successfully trade the stock market like any stock trading professional who makes a living off the daily fluctuations inherent within it.
1. Keeps the stocks close, but keep your broker closer
One easy mistake a lot of non–certified brokers make when trading the market is thinking they can go it all alone with simply their knowledge and analytic skillset. As much as these help greatly, you can never know more about a market and its intricate goings on than those who everyday work within it. Being chums with your broker does not necessary mean knowing his or her birthday off hand, it does however mean being able to easily call on them to get advice on what sectors or stocks you should be or could consider analyzing for your trade portfolio. In a world where there are so many equities to pick from to trade, and consequently anything could easily go wrong, having an ‘insider’ goes the distance to keep you abreast of happenings within the market that could make you some worthwhile money.
2. Watch the Numbers, the devil lays within them
Trading stocks is not just about knowing which stocks are ‘hot’ and which are not. It also involves understanding why. Many a time, the answers lay within the numbers, or more commonly, the company released financials. Knowing how to read and appropriately understand company financial statements and deduce ratios can give you great insight into what stock(s) to take a position in and why, especially when the market is looking the other way.
3. Establish a goal line:
Trading stocks can be fun, particularly when you have made a ‘good pick’ and the market value begins to rise soon after taking position. But you must understand, that the market is fickle. Nothing within it stays up for long, and nothing within it stays down forever. Thus, you must establish your risk threshold by taking into account your age, income level, trading goals and timeframe, short-term financial needs and how far up you are willing to ride a wave.
Conversely, the reverse holds true. You must take into account how far down you are willing to go with a stock before you jump ship. However, as stated earlier, being able to decipher financial numbers and a cursory chat with your broker should always be your navigators to whether to take position in the first place or otherwise. Jumping ship, in and of itself, can be expense, particularly if you jump too early, or worse, too late.
Thus, you must…
4. Lose the crowd, they could be herding you into a trench
Nothing can be more tempting than seeing a stock price rise astronomically, and with the potential for further gains. Unsavvy traders are plenty akin to wanting a piece of the short-term action without understanding how much gas in still left in the tank to get your trade far enough to cover your expense. You must understand, for every time you make a trade, expenses are made to your broker, the market authorities, and even the government in terms of payable fees and deductible taxes. Should that rise in price not be enough to cover these and then make you some extra money on top of that, hate it or love it, you have simply made money for others and not yourself.
Also, in more cases than one, should you suddenly notice unexplained rises, particularly astronomic, in a stock price, that ship has already set sail, and jumping into the water to try and swim up to those who had already booked their seats, perhaps week or months in advance, could see your investment sink to a watery financial grave, never to be recovered.
Cons also do exist in many fields of business and the stock market is one of the oldest fields these types have played in. Meaning that sometimes, people with boatloads of money could simply be buying into a company to legally, but artificially inflate its price to their gain. Without firstly, adhering to the first two rules above, you might be left holding an empty bag when your hopes of a quick four-day gain turn into only one day and then the market completely reverses on you, falling even way below your buy–in price.
One surefire rule to follow in such cases is ‘if the numbers do not support the rise, then do not be enticed’.
In other instances however, a company may have released above expected financial results and the market excitedly dives in to take position in expectation of financial rewards to its shareholders. As much as taking position along with the market may be justified, you need to question your timing and reasons. Remember, you are ‘trading’, ‘not investing’. You must thus analytically project how much steam is sustainably left in the engines to carry your speculative investment to worthwhile profitability otherwise, you are once again, simply making money for someone else. This then leads to the next point…
5. Watch the stock not the market:
One easy way of ignoring short-term, and sometimes unjustified, mass-market excitements is a quaint little trick used by savvy traders called ‘cherry picking’. This involves analyzing a load of companies and then deciding on just one or a handful that are seemingly undervalued to take up positions in. Adopting the ‘cherry picking’ strategy to find undervalued stocks gives you room, and justification, to fully understand a company and how its stocks traditionally perform under varying economic and market conditions and then deciding the best price to buy–in. Consequently…
6. The buy–in, watch the buy–in!
Stock market investing takes little regard for prices at which a company’s shares are bought. Regardless of the price, an investor is willing to ride the waves as the months and even years roll by, knowing full well that as long as the company stays healthy and profitable, so will their investments. In stock ‘speculating’ however, since you have a short-term view of your investment, knowing when to buy-in is critical to profit taking as buying at too a high price could erode potential profits and vice–versa. This ties back to watching the stock. Closely studying the company’s fluctuating prices will give you a solid idea of what its 52-week historical fluctuations have been and when to get aboard or jump ship.
7. Keep your nerves about you
One important fact you must understand about market speculating, and most importantly, company performance analysis comes down to how well you can reign in your emotions and stay your course of action regardless of the shot-term fluctuations, good or bad, particularly bad.
In a price uptick, undiscerning traders, not having already drawn a goal line and wanting to follow a wave to its crescent, ineptly neglect that crescents arch in the opposite direction too. This makes the establishment of goal lines all the more important as it disciplines you to not only a buy–in but a sell–off price as well, regardless of how high the crest may go. This way, you do not wake up hoping to sell the following day or higher than your target price, only to find the market has reversed on you and keeps diving faster than you had hoped.
8. Avoid unsolicited advice
This ties back to watching the numbers. Many unsavvy traders are want to follow advice from supposed stock market gurus without first vetting the numbers themselves. Remember, it is your money at stake, not theirs. Also, some give unsolicited advice hoping to excite the market enough to increase their positions in said companies and then sell at significantly more profit, at your expense.
9. Avoid cutting corners
Remember savvy traders who make good gains from stock trading did not get to where they are overnight. Several hours are slaved on watching the market, ‘Cherry picking’, and then perfecting a strategy that eventually work in their favour. Do not expect your happy trading journey to happen overnight either. Be patient, stay focused…
10. Keep an eye on the cycles and seasons
To be able to successfully ‘speculate’ in the stock market you must understand that certain stocks spike in price during certain periods and seasons, and others do not. Some traders call this cyclical or seasonal trading, others simply call it what it is – trading. Whichever way you look at it, some stocks spike in price at certain times because of such, more common things, as high dividend payouts and or other expected rewards to investors. For some traders, once they have cashed in on these rewards, they move on to the next stock, consequently causing an expectant drop in price.
Being a savvy trader means knowing when these cycles happen and what to do each time. Buying after the stock price has cooled off is one way to go, however buying into the company well before the expected cycle, or commonly called, its ‘earnings season’ begins is typically the best option since you can never tell how low a stock price can go until there exists little to no interest in it enough to take position.
Thus, knowing company financial year ends and when they traditionally announce dividend or reward payouts is a vital tool to marking cycles and staying ahead of the seasons before they happen.
11. Benchmark within sectors, not without
One common mistake novice traders’ make is benchmarking one company’s performance with another, or others, outside the sector that it operates in. This is a common recipe for failure as even though both companies may engage in seemingly like businesses, but are paired in different sectors for no other reason than the happenings within such sectors are affected by totally different market, governmental and economic factors from one another. These factors consequently affect how they make money and comparative ratios.
Thus, you should compare like companies and within sectors to know which of them are undervalued within the sector enough to speculate on.
12. Look for healthy companies
Remember, not all losses are bad and not all gains are good. The only way to know for certain if a company is still financially healthy and its shares worth something people will happily trade it for should you buy into it. Thus, carefully analyzing its financials, sometimes, going back as far as five years, to particularly understand why it made a loss and if it can bounce back, will give you worthwhile insight to whether the loss was unexpected, but is carefully managed by the company’s board, or if the company is simply a disaster waiting to happen, in many cases due to negligent oversight from its top cadre officials.
However, if you keep your wits about you as earlier cited, silver linings do appear in the oddest forms, particularly when speculating in the stock market.
13. Concentrate, do not dissipate
It’s a common misconception that spreading your risk around many stocks is the best strategy against loss when ‘trading’ the market. Nothing can be further from the truth. In an analogy that holds true, were you to go to a market in one part of town to buy a large quantity of fruits to transport to another part, would you rather hire one large trailer to move everything at once, or several small pickups that could charge you much more than what the trailer driver would, and could all deliver at different, sometimes inconvenient, periods?
Apart from incurring multiple charges and taxes on your portfolio, dissipation carries a higher risk of something going wrong with either one or some of the stocks. And realignment of your portfolio can be expensive indeed, unlike were all your eggs to be in one basket and you watched that basket like a hawk.
Besides, it’s less trouble having to deal with one or a less than a handful of healthy companies than several regardless of how healthy they might all seem.
14. Keep your life’s savings away from the market!
Even though stock market speculating can be risky, it becomes riskier when you adopt a gambler’s mindset. Commonly called the ‘all or nothing’ strategy, this may make you some money at first, but unless you and a few others are illegally manipulating the market to personal gains, like the Wolf of Wall Street, you will eventually lose a ton of money and consequently your savings. Reason being that any little uptick, or downturn, in a stock price could lead to anxiety, or overexcitement, consequently leading to mistakes. Remember, you must find a way to keep your nerves in check, and trade only what you are ready to lose should the market turn on you.
Luckily, a seeming lose in short term trades may eventually become a profit in long term investing. Which is one good reason to keep your life saving well away as you may need an immediate financial propping in the unfortunate case of an unexpected downturn.
15. Do not count your chickens before they hatch
Sure, it’s okay to feel good about a trade that’s going your way, but remember, the money isn’t in your hands just yet. You have to make a successful sale first. This goes back to the numbers. Seeing a stock doing well is one thing, being able to successfully buy–in or sell while the price is considered low enough or high to profit from a future spike is quite another. Studying a company’s share trading pattern closely to understand how much of these are traded daily will help you steer away from illiquid stocks whose price may be going up but seemingly has little to zero shares being traded on the market enough to buy into or find someone to buy them off you and at your exist price. Remember, it could be a con, so call your next best friend, your broker, to confirm.
16. Embrace simplicity
After all the indices, matrixes and ratios, remember, your number one gal should be how to make money trading the market with as little risk as possible and then how to get out. A good stock is a good stock, and unless the numbers tell you otherwise. Conversely, a bad stock is a bad stock and a consistent drop in market value rarely occurs without, often glaring, technical warning signs. Novice traders routinely ignore these negative telltale signs and allow hope to replace common sense, thus setting themselves up for heartbreaks.
So, trust your gut and especially the numbers. If they do not look good by any counts, better to do your stock hunting elsewhere.
17. Do not fall in love
Remember, you are in the market to trade, buy and sell, not fall in love, particularly with any one stock for any given period of time, longer than your prearranged markers tell you to, no matter how much it has made you in the past. As already stated, no one stock spikes forever. What goes up, will eventually lose steam, and unless you are in it for the long haul then learn to keep your affectations for any company shares at home the instant you set your mind to speculating in the market. Remember, keep your emotions in check…
18. Make peace with losses
Understand, money is simply a tool for wealth, not wealth itself. Stock trading is one of the few professions where the occasional loss of money is a natural path to success and every successful trader today has lost money, particularly in their early trading days. So do not be discouraged, but also know when to quit or take a break, regroup or realign your portfolio for optimum returns.
Avoid trying to make up for more losses with even more trades, particularly on the same stock. Revenge or addictive trading is simply what it is – gambling and a sure recipe to financial ruin.
19. Set your own rules, and do not break them
Reflective of the goal setting rule, creating market speculating rules for yourself are essentially advised to get you out of trouble should things go south. If you do not allow them to guide you, the goal line has been shifted in the direction of disaster. Also understand that the gurus who have trading rules and have been successful following them, set these up by themselves and for themselves, so why can’t you?
20. Sometimes it is simply a waiting game
Sure, speculating is a near, if not immediate term investment strategy for making money, but that does not mean you will begin to see results overnight, unless you know something the general market, and your broker, does not.
Sometimes, despite tracking the numbers and following the seasons, it can sometimes come down to waiting for the appreciations to eventually appear. It could take days, weeks, sometimes, months. As long as you have formulated a strategy you trust and deciphered the numbers to positive results, it is best to reign in your emotions and simply wait for the results to appear and not be too hasty about profit taking.
Brain Essien is a business consultant, with expertise in digital marketing, crowd funding, pitch decks and business plan/proposal formulation and design. mcbrainandcompany@gmail.com. +234703-444-6041