en
en

What you need to know before investing in stocks

Published: 2021-03-20 17:30 By Dualix

Investing in financial markets can be life changing. The stock market, in particular, has proven successful at generating and preserving long term wealth for investors who picked the right stocks. Unfortunately, for many inexperienced traders, it can result in devastation.

Many traders approach the market believing that investing in stocks just requires them to pick a company they expect will increase in value. Of course, that’s part of it, but there are many more dimensions involved.

There is a lot more to consider when trading stocks, and this article will introduce you to the main dimensions to be aware of. To be successful, you need to be competent at market timing, predicting trends, establish a trading method, choose the right stocks and consider diversifying your portfolio.

Market timing

Stocks don’t just go up. They also go down, then back up again, then down again, and so on. Timing is everything; to maximise how much you can earn by trading stocks, you’ll want to buy at the beginning of a trend and sell before the trend peaks.

Most people will agree that investing in Amazon ($AMZN) would be a good call. Take these two examples:
a) You could have bought shares on the 2nd of January 2020 at $1,875
b) You could have bought them on the 4th of January 2020 for $3,270.

What you need to know before investing in stocks

Published: 2021-03-20 17:30 By Dualix

Investing in financial markets can be life changing. The stock market, in particular, has proven successful at generating and preserving long term wealth for investors who picked the right stocks. Unfortunately, for many inexperienced traders, it can result in devastation.

Many traders approach the market believing that investing in stocks just requires them to pick a company they expect will increase in value. Of course, that’s part of it, but there are many more dimensions involved.

There is a lot more to consider when trading stocks, and this article will introduce you to the main dimensions to be aware of. To be successful, you need to be competent at market timing, predicting trends, establish a trading method, choose the right stocks and consider diversifying your portfolio.

Market timing

Stocks don’t just go up. They also go down, then back up again, then down again, and so on. Timing is everything; to maximise how much you can earn by trading stocks, you’ll want to buy at the beginning of a trend and sell before the trend peaks.

Most people will agree that investing in Amazon ($AMZN) would be a good call. Take these two examples:
a) You could have bought shares on the 2nd of January 2020 at $1,875
b) You could have bought them on the 4th of January 2020 for $3,270.

On the 3rd of February 2021, Amazon shares peaked at $3,434. In example a, if you sold at the peak, you’d have a profit of $1,559, whereas, in example b, you’d have a profit of $164.

On the 5th of March 2021, Amazon shares reached a low of $2,881. In example a, if you sold at the dip, you’d still have a profit of $1,006, whereas, in example b, you’d have a loss of $553. Although you don’t technically lose money until you sell the stock, you’re put in an uncomfortable position, wondering if it will go back up and whether you made the right decision. Another side effect is that you’ve got $3,270 tied up in an investment that isn’t performing in this scenario, and you could otherwise use that capital elsewhere.

Identifying trends


When trading stocks, timing is essential to profitability. You might be thinking, how can anyone predict when a stock will go up and down? Well, financial analysts dedicate their life’s work to exactly this. There are numerous statistical tools and models designed to predict the peaks and dips of stocks.

The notion of predicting the future price of a financial instrument is similar to forecasting the weather. Meteorologists don’t tell you that at precisely 10:34 on Tuesday, it’s going to rain. Instead, they give approximate times, such as saying that between 9 and 11 am on Tuesday it’s going to rain. Stock analysts predict price zones rather than specific prices.

Analysts look at a broad number of metrics to determine a viable investment. They look at correlations with other markets, trading volume, momentum, price action, support and resistance levels, historical averages, and many more.


Invest in the Market

As you don’t have unlimited funds to invest in the market, you need to be sure you’re allocating your available cash to the best possible investment. For example, a trader might consider $AMZN and Google ($GOOG) to be great picks at the start of 2020, and with a $10,000 investment allocated 50% to each company. They certainly would be profitable, but they could have been more profitable if they bought only $AMZN in 2020 and sold at the end of the year to buy $GOOG since Google has shown better performance than Amazon in 2021.

Diversification

Although we explained how it could be better to put all your eggs in one basket in the previous section, it’s not always the case. Stocks in the same industries correlate. For example, tech stocks, banking, retail, healthcare, and automobile sectors generally correlate. This means if all your stocks are in one sector, and that sector goes through a correction or downward trend, then all your stocks will depreciate. Some investors balance this out by investing in stocks from various sectors.

Conclusion

As you can see, there is a lot to think about when trading stocks. There are so many variables and a painful journey of self-doubt. Many traders find that worrying about the stock market distracts them from their careers and negatively impacts their primary source of income.

Many traders find it beneficial to work with an investment advisor who can collaborate with you to develop a game plan, determine how to pick stocks for your portfolio, how to diversify the portfolio and with what sectors. Once all that is decided, the investment advisor will follow the trading strategy, find the best times to buy and sell and monitor the markets so you won’t have to.

Dualix, a licensed investment firm and portfolio manager, offers a concierge trading service that helps traders invest their capital wisely and offers ongoing portfolio management to adjust to constantly changing market conditions.

Leave your details to get a call from one of our professionals.

On the 3rd of February 2021, Amazon shares peaked at $3,434. In example a, if you sold at the peak, you’d have a profit of $1,559, whereas, in example b, you’d have a profit of $164.

On the 5th of March 2021, Amazon shares reached a low of $2,881. In example a, if you sold at the dip, you’d still have a profit of $1,006, whereas, in example b, you’d have a loss of $553. Although you don’t technically lose money until you sell the stock, you’re put in an uncomfortable position, wondering if it will go back up and whether you made the right decision. Another side effect is that you’ve got $3,270 tied up in an investment that isn’t performing in this scenario, and you could otherwise use that capital elsewhere.

Identifying trends


When trading stocks, timing is essential to profitability. You might be thinking, how can anyone predict when a stock will go up and down? Well, financial analysts dedicate their life’s work to exactly this. There are numerous statistical tools and models designed to predict the peaks and dips of stocks.

The notion of predicting the future price of a financial instrument is similar to forecasting the weather. Meteorologists don’t tell you that at precisely 10:34 on Tuesday, it’s going to rain. Instead, they give approximate times, such as saying that between 9 and 11 am on Tuesday it’s going to rain. Stock analysts predict price zones rather than specific prices.

Analysts look at a broad number of metrics to determine a viable investment. They look at correlations with other markets, trading volume, momentum, price action, support and resistance levels, historical averages, and many more.


Invest in the Market

As you don’t have unlimited funds to invest in the market, you need to be sure you’re allocating your available cash to the best possible investment. For example, a trader might consider $AMZN and Google ($GOOG) to be great picks at the start of 2020, and with a $10,000 investment allocated 50% to each company. They certainly would be profitable, but they could have been more profitable if they bought only $AMZN in 2020 and sold at the end of the year to buy $GOOG since Google has shown better performance than Amazon in 2021.

Diversification

Although we explained how it could be better to put all your eggs in one basket in the previous section, it’s not always the case. Stocks in the same industries correlate. For example, tech stocks, banking, retail, healthcare, and automobile sectors generally correlate. This means if all your stocks are in one sector, and that sector goes through a correction or downward trend, then all your stocks will depreciate. Some investors balance this out by investing in stocks from various sectors.

Conclusion

As you can see, there is a lot to think about when trading stocks. There are so many variables and a painful journey of self-doubt. Many traders find that worrying about the stock market distracts them from their careers and negatively impacts their primary source of income.

Many traders find it beneficial to work with an investment advisor who can collaborate with you to develop a game plan, determine how to pick stocks for your portfolio, how to diversify the portfolio and with what sectors. Once all that is decided, the investment advisor will follow the trading strategy, find the best times to buy and sell and monitor the markets so you won’t have to.

Dualix, a licensed investment firm and portfolio manager, offers a concierge trading service that helps traders invest their capital wisely and offers ongoing portfolio management to adjust to constantly changing market conditions.

Leave your details to get a call from one of our professionals.

This website uses cookies

This website uses cookies to ensure you get the best experience on our website.