Stock trading can be a great way to make money. But it’s not without risk and so it can also be a great way to lose a lot of money.
When first getting into trading stocks it’s important to understand a few things. First, you’ll need to know what your goals are for your stock trading. Are you looking to increase your savings for retirement? Are you looking to create current income and live off of what you make from stocks?
What’s your time frame? In other words, how often will you most likely be making trades? Are you day trading? Will you be holding stocks for a week? A year? Five years?
This seems like a lot of questions but they all play a part in what type of stock trading may be most appropriate for you, as well as the amount of risk that can be taken. In general, the longer the frame you have, the more risk you can take.
If you need the money you’re investing sometime next week, you really shouldn’t be trading stocks with it right now. The risk of loss is too great, with no time for recovery.
Once you’ve established your goals and answered these questions, you can begin looking into what type of trading you want to do.
For longer term trading or investing, the focus should be more on the fundamental analysis of the company itself. This means taking a look at things like the company’s growth prospects, such as its sales and earnings growth.
Is the company positioned to do well over the next few years? Are there growth opportunities such as bringing a new product to market or increasing their market share in an industry?
Another important factor when looking to buy or sell a stock of a company is its P/E, or price to earnings ratio. This is simply its stock price as a ratio to it’s earnings. In theory, a company that is growing earnings at 15% per year should have a price to earnings ratio of 15.
But other factors come into play, such as future earnings prospects. How fast a company is growing plays a big role as well, since traders and investors will pay a premium for higher future growth.
The famous value investor Benjamin Graham would look for companies that had a lower P/E than they deserved, usually because of short term issues, and invest in them to hold for the long term until the market caught up to their true worth.
This type of investing requires a lot of research as well as being a long term investing strategy. Even when picked correctly, it can take years for an undervalued stock to recover to its true worth.
When looking to do more short term stock trading, stocks move up and down on many other factors that don’t always go hand in hand with how the company is actually doing.
In fact, in the short term a stock can continue to go up or down based on the simple fact that its heading in one direction and the market (investors) jump on board.
This is trading based on trends. If a stock is going up short term, most likely it will continue to do so. The big risk is that you invest right before the turn around and lose your investment.
Short term stock traders focus more on technical analysis. Technical analysis is more about data based around the stock, and not the company. While things like P/E and sales growth are about the company, things like trading volume (how many shares are being bought and sold) are about the stock itself.
Technical stock traders will follow things like trading volume, looking for times when the volume of shares being traded suddenly jumps. This can be an indication that it’s time to get into or out of a trade.
Stock trading is not nearly as easy as some make it out to be and these ideas above are just scratching the surface of the variety of trading strategies that are available. It takes a lot of time and research to become a good stock trader and there are great risks involved.
But there can also be great payoffs with successful trades. But do not go into stock trading without having done a lot of research. It’s very important to be prepared when it comes to trading stocks.