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Since thousands of years ago people have understood that the concept of buying something at a low price and selling it later at a higher price has economic benefits. It is the same basic principal of Stock Trading in today’s financial market.
Despite such simplicity, many people, market experts and financial institution lose money in Stock Trading. This raise the question of WHY?
Many traders (both retail & institutions) lack the skills and understanding of financial knowledge to trade stocks.
An investor has to decide where he wants to trade. Is it a global exchange such as Hong Kong Stock Exchange or London Stock Exchange or is it NYSE & NASDAQ in US or a regional exchange in Dubai, Mumbai, Shanghai and Singapore? Most investors have developed an affinity towards their own local exchange because they are familiar with the companies listed there, even though it may not be the best stock exchange. A smart investor would definitely choose a market with the highest trading volume and full of liquidity where all the global players are. This is none other than NYSE & NASDAQ. Both these Exchanges have a combined trading volume of 150 billion dollars on any normal trading day. Such volume and liquidity is way above the rest of the stock exchanges around the world. With a huge trading volume and a broad range of investors with different risk appetite, it is often easier to pick a profitable trade.
An investor has to educate himself or herself on the latest global trend and thereafter identify the current or upcoming favorite trading sector of the market. It could be bio-technology and pharmaceutical corporations due to outbreak of global epidemic. It could be energy sector because global economy is picking up. It could be a certain type of commodity sector because of a drop of global output as a result of bad weather/disease outbreak in another major producing continent/country. Trading stocks in the right sector do not necessarily lead to profit but it is more likely that the price of those stocks will enjoy an upward momentum, at least in the short term. An ill-informed or ignorant investor may end up buying the wrong stocks because everyone else is already dumping those stocks and moving to the “hot” sector.
There are many analytical tools that can be used to decide whether to buy/trade a particular stock. Basic knowledge such as support level, resistance level, moving averages, fundamental, price/earnings (P/E) Ratio, oversold or undervalued scenarios must be considered at all time. Investors tend to trade “hot” stocks because it is among the Top 10 actively traded stocks of the day without actually knowing the reason behind it. Some investors may end up buying Top 10 biggest loser of the day, expecting it to rebound the next day. All irrational trades eventually lead to huge losses.
Every stock has its own characteristic. Some people call it the DNA of the stock. Some stocks always rise before dividend call. Some stocks rise before the launching of their new products. Some stocks rise on certain months of the year. Some top management have a history of launching Stock Buyback (Share repurchase) Scheme to prop up the share price before holding shareholder's Annual General Meeting (AGM) in order to make their shareholders happy. Some stocks do not follow any specific trend. An investor must study a particular stock in absolute detail before trading it, which is something that 9/10 retail investors don't do.
Timing is everything especially in stock trading. An investor needs to learn about all the market indicators so that he/she doesn’t go against market trend and force.
Financial institutions such as brokerage firms and banks have set up a system that most traders will eventually lose money.
Three most common ways to trade stocks:
As we pointed out, the principal of stock trading is simple. Buying at low and selling at high. However, stock trading is not a gentlemen’s market. There are a lot of tricks and speculations going on at the same time. True facts, rumors and lies are all jumbled up and an investor needs to have the skills, knowledge and experience to interpret all available information and data. Even Institutional players are always looking for ways to win money from one another and retail players don’t have much of a chance to even survive, let alone making profit.
Hence, Financial.org aims to educate our members on how to become good stock market traders. There is no such thing as guaranteed win trades but there is a winning formula for success for those who are willing to learn and put it into practice.