For a beginner, the concepts of stock trading seem daunting especially because there are a lot of technical terms and analysis involved. With experience, the process becomes simpler but no less stressful. A lot of investors who had been in the business for years can lose thousands, if not millions, of dollars overnight. There will always be risks involved in stock trading but there are ways to minimize your exposure. The Basics of Becoming a Stock Investor As an investor, there are three basic questions you need to examine when you’re interested in a listed company. • How much did other investors pay for the company’s stock? • How much will the stock likely to be valued in the future? • What factors can change the perspective of other investors? It is important to establish certain expectations about the return on investments. For example, if you’re interested in buying stocks from three companies, critically examine how much you’re willing to invest in each one. If one company shows dramatic growth potential over the short term, determine how much you want to invest in this company. On the other hand, if another company displays long term growth potential, calculate the amount of money you can afford to “tie up” with the stock. Understanding the Stock Market Generally, the stock market can be used to measure the economic health of a certain location. If production is high, inflation low, and unemployment minimal, the overall market gains. This is called the bull market. On the other hand, if the economy is experiencing a downturn, this is referred to as the bear market. Except in extreme economic circumstances, the drastic changes in the stock market are typically not brought about by the country’s economic health. It has more to do with the investor’s perception of the company’s health and the overall economic condition. When a certain stock suddenly becomes highly in-demand, other investors join in the fray and this drives the price further up. The opposite is also true because if a number of investors suddenly let go of a certain stock and its prices falls, other investors will do the same before the price becomes too low. For this reason, it is critical to have back-up financial resources before you decide to engage in stock trading. The market is vulnerable to investor psychology and perception. There will always be risks involved in stock trading no matter the amount of technical analysis you do. What You Need to Know About Stock Trading After you bought some stocks, you can take it one step further by learning about stock trading. If your stocks are not producing the returns you expected, consider trading it in for a potentially higher-yielding one. Stock trading can occur in two ways: in the exchange floor and computer systems. The former is more popular because movies and television shows depict the chaos in the exchange floor to your screen. The second technique, done through computer systems, is actually less complicated. However, the investor still needs to have a broker because the general public does not have access to investment programs. In this setting, the investor typically receives immediate confirmation through email.
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Fundamental Analysis is an important part of beginners stock trading research. While it can be less fun than technical analysis (charting), the value it brings is indispensible. Half of the challenge is knowing where to start. Fundamental analysis involves so many different aspects, it is easy to get lost. The goal is to evaluate as much information as you can regarding the company and its corresponding industry.
The general idea is to research various quantitative aspects of the company. This includes revenue, profit, and debt. There are also more qualitative aspects to investigate, such as a company’s ability to compete with others in the industry. Putting these pieces together will give you the “big picture” of the company and its direction, in beginners stock trading.
Delving deeper into qualitative factors will be challenging, as there is no real way to assign a number to these values. It’s more of a “touchy-feely” process, when forming your opinions in beginners stock trading. A few of the most common factors are listed below:
Management – Who is involved? Have they been involved in other successes or failures in the past?
Business Model – What does the company do, and how does it make money?
Competitive Advantage – What, if anything, makes the company better than its competitors? Patents? Advanced processes?
Market Share – Is the company’s market share growing or shrinking? How does it compare to its competitors’ market share?
Industry – Is the industry growing or shrinking in the current economy?
Looking at quantitative factors is a bit easier, as each factor should have a specific number or yes/no answer. The most important aspects in beginners stock trading are as follows:
Financial Statements – Are they audited by an independent auditor?
Balance Sheet – What are the company’s assets and liabilities valued at?
Income Statement – What are the company’s revenues, expenses, bottom line, and profits (if any)?
Loans – How much does the company owe? How soon will they be debt free?
Cash Flow – What is the company’s cash flow value?
Of all the fundamentals, the financial statements are the most important, in beginners stock trading. Knowing where the company stands, in regards to profit, assets, liabilities, and cash flow, is a must. Then the qualitative aspects should be researched. This should form an overall representation of the company. Is the company successful now? Will it be successful in the future? Is management making the right decisions and leading the company in the right direction? Once that research is complete, you can move on to technical analysis to determine the stock’s trend as well as your entries and exits.
As mentioned in the previous chart indicators tip, price charts, themselves, are not informative enough to make decent trading decisions in beginners stock trading. Adding indicators to a chart can be helpful in spotting a good entry or exit. Of course, indicators are just an extra piece of information that gives more insight about a stock and how it is trading. Some indicators appear as an overlay on the main price chart, while others appear below the main chart as a separate mini-chart. In the previous chart indicators tip, we looked at some basic indicators. Here are a few of the more advanced indicators for beginners stock trading.
Relative Strength Index (RSI): The RSI is a useful indicator that shows a stock’s current momentum in beginners stock trading. It does this by comparing recent gains to recent losses. The resulting number is plotted on a scale from 0 to 100. Generally, any number over 70 indicates that a stock is overbought, and may fall soon. On the other hand, a number below 30 would suggest that a stock is oversold, and may rise soon.
Money Flow Index (MFI): The MFI indicator is very similar to the RSI, but it also takes the stock’s Volume into consideration. By doing this, a relative measure of money flowing into, or out of, a stock can be seen. Generally, the higher the MFI value, the more money is flowing into the stock, and therefore, the higher the share price should go. Of course the converse is true, too, where lower MFI values mean money is flowing out of the stock, which would reflect a falling share price.
Average Direction Index (ADX): In beginners stock trading, the ADX is used to gauge whether a stock is trending (and how intensely) or simply trading sideways. A measure of the force of the upward moves and downward moves is combined to produce this indicator. When the value crosses downward, below 40, the current trend could be weakening; resulting in sideways trading. However, the stock could begin to trend if the ADX value heads upward, crossing the 20 level.
Williams %R: This indicator is a variation of an oscillator-type indicator, and measures overbought and oversold conditions. In this instance, the scale runs from 0 down to -100. An overbought condition occurs when the value is between 0 and -20. Conversely, an oversold condition occurs when the value is between -80 and -100.
When used properly, these indicators can seriously assist you in beginners stock trading. It is easy to reach information overload, if you add too many indicators. Try a few at a time, finding what helps the most. Use the KISS principle. Three or four indicators are usually all you need for decent results.
