Stock Trading is very similar to any other business. Stock trading is not a get rich quick plan. It calls for a systematic approach. A successful trader will have to spend time, learn the systems, find out the systems that best suits him. It is a wrong belief that trading is something which can be done by anyone by just investing his money in the stock market. This kind of approach to trading is the best way to lose money. Before you venture into stock trading you should learn about the basics of trading. Thereafter adopt a professional approach to trading.
A Professional Approach to Equity Investing. Now what is a professional approach to equity investing. If we look at the approach that is followed by a businessman who is starting a new venture we will understand the meaning of a professional approach. He is more concerned with what will be his investment and what he will get out of that investment. Every business carries a risk and chances of incurring losses are there. A businessman with a professional approach will identify the risks and find out how to manage them arrive at the extent of loss that he can bear.
The core issues in a professional approach to investing in equity is determining the following
- Capital at your disposal
- Your risk taking capacity
- Extent of loss you are willing to bear
- Your expected rate of return on your capital
- Time frame for earning this return
- Probability of winning and losing trades
- Creating a trading plan
- Capital to be invested in each trade
- Number of outstanding trades at a time
- When to buy - time to enter the trade
- When to exit - time to close the trade
- Stop Loss Limits - for trades that go against you
- How Long to hold a stock
- Preserving your capital and Money Management
Intent and Objective
Statement of Purpose - It is very important for you to have a clear idea before you enter into equity investment on the following points.
- Why you want to trade and invest in the stock market?
- What do you hope to gain from trading?
- What are your trading goals?
- How do you plan on becoming a better trader?
- How are you going to use your trading plan?
- Clearly define your purpose for trading and investing.
- State your goals and what you hope to gain and achieve through trading.
Fundamental Analysis and its application
Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't really investing if you aren't performing fundamental analysis.Because the subject is so broad, however, it's tough to know where to start. There are an endless number of investment strategies that are very different from each other, yet almost all use the fundamentals. Fundamental analysis mostly involves reading and interpreting the financial statements. [More ...]
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Technical Analysis and its application
Technical analysis studies the supply and demand in a market in an attempt to determine the direction in which the market will move. It attempts to determine the price trend that will continue in the future. Technical analysis studies the markets inorder to understand the market emotions. [More ...]
Understanding Research Reports
Analysts through their research provide recommendations or ratings, with what investors should do. They give recomendations like “strong buy”, “buy”, “neutral”, “sell”, and “strong sell”. These analysts are employed by banks, non banking financial institutions, Mutual Funds and Stock Broking companies to provide their recommendations to the company itself, to clients of the company or to the investors.
- Strong Buy is the rating offered when the analyst believes the stock will dramatically outperform the market and/or other stocks in its sector. This is the strongest recommendation an analyst can give in favor of acquiring a stock.
- Buy is a rating to purchase the stock. While the analyst recommends acquiring the stock, it is a less enthusiastic recommendation that a strong buy. This rating is also known as “Outperform” and “Trading Buy”.
- Neutral is given when the analyst recommends neither purchase nor sell because the evidence does not lead the analyst to believe that the value of the stock will either increase or decrease in the foreseeable future. This rating is also known as “Hold” or “Market Perform”.
- Sell is a rating by the analyst to liquidate a particular stock based on the analyst’s belief that the price of the stock will soon decline. This rating is also known as “Underperform”.
- Strong Sell is the rating offered when the analyst believes the stock will dramatically underperform the market and/or other stocks in its sector. A strong sell is the most negative comment an analyst can give with regard to the expected performance of a stock. This rating is also known as “Avoid”.
Now the question arises - Should we believe and act upon these recommendations or not?
No doubt the stock analysts play a useful role as an information source. We should never rely only on their recommendations. Investment decisions should not be made purely on what an analyst is recommending. There is every possibility for a conflict of interest to exist which may compromise and throw a doubt on the analysts objectivity in evaluating the stock. For example if the analysts firm is one of the underwriters for the company whose shares he is evaluating, then there is every possibility that he may be more interested in seeing that the general public subscribe to the issue. He recommendations may be a "strong buy" which might not be truly warranted. We should not use the analyst's report alone but also have our own analysis.
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