Stocks and Shares: The Low-Down
Stocks and shares are some of the most common and well-known financial instruments on the market today. Shares in publicly traded companies are found on established national stock exchanges such as the FTSE (Financial Times Stock Exchange) 100 or FTSE 250 in the UK. These companies have taken the specific decision to sell some or all of their shares to the public, often to raise money through what’s known as an initial public offering (IPO). Other stocks are privately traded, which means that they’re owned by their directors or other personnel and are often available to buy only if you’re a private investor, rather than a stock trader.
Regardless of the type of shares you plan to trade, there are lots of reasons to devise a simple trading strategy that suits both the behaviour of the broader market and your own investment goals. Besides thinking about which national stock market you might want to invest in, or what triggers cause your preferred market to move, for example, you’ll also need to think about your attitude towards risk and reward and how much you’re willing to invest to get your stock trading career off the ground. Whether you need to formulate a stock strategy for beginners, or you’re a professional looking to re-calibrate your trading strategies for the long term, it’s always wise to think about maximising your tactical chances.
The Practical Side of Trading
Stocks can be obtained in various ways. Company owners, for example, have shares in their firms, but they’re not considered traders. Traders are those who buy shares on the stock markets with the express intention of speculating on their value. In other words, they are aiming for the value of their stock to increase to a higher level than when it was bought. To begin trading, you’ll usually need to sign up with a broker who can facilitate the purchasing of the shares. Finding the best stock broker for your needs is something that often requires a bit of research beforehand, but it’s easy enough to do if you complete a quick stock broker comparison with your aims in mind. The broker you choose can have a significant impact on the sort of strategies you can implement.
If you select a CFD stock broker, for example, you won’t own the stock itself, although your investment will be linked to the market on which your stock is usually traded, and the experience will be largely the same. A CFD stock, though, works on a leveraged basis, which means you can trade on the margins and boost the amount of profit you can earn (or, of course, make the loss you incur greater). Your decision about how you’d like to trade stocks can have a profound impact on your strategic planning – so it’s wise to build this into your trading strategy.
REMOVING THE EMOTIONAL ELEMENT
Compared to many fields, stock market trading is an odd, hybrid discipline that often combines both art and science skills. It requires both the quantitative data skills of mathematics as well as an understanding of behaviour and risk that only an analytical mind can provide. It takes a certain type of person to remove the emotion from big decisions about whether or not to buy or sell. If a holding begins to decline in value one day, for example, a less experienced or more nervous, trader may be tempted to sell straight away to cut their losses.
- Both analytical and mathematical skills are often required for trading
- Emotional trading is a real risk with the stock market
- Traders may be tempted to sell following a bad performance
- Following a strategy can cut the risk of executing emotional trades
A tactical trader with solid stock trading strategies in place, however, would be more likely to recognise that the market may smooth itself out over time. This is all the more reason to ensure that you have a robust strategy in place. When you are following a pre-determined strategy, you’ll be able to more easily dismiss the temptation to sell your holdings if there is a sudden decline in value. If you don’t have a strategy in place, though, you might find yourself buying and selling emotionally – and that’s often a recipe for trading disaster.
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What are Your Preferences?
When it comes to trading on the stock market, you first need to work out what your preferences are. Some traders enter the stock market with the express intention of investing in particular types of stock. Often, this is related to their broader financial situation. People who have amassed or come into a large sum of investment capital, for example, may choose to invest a small portion of it in a high-risk stock for experimental purposes.
- The size of your capital investment may dictate your preferences
- When a trader has more capital invested elsewhere, the risk may be more advisable
- Diversification (moving investments across many different instruments) is usually a good idea
- Returns are never guaranteed, so not all eggs should be placed in one basket.
People who have a smaller amount of capital and are unable to diversify as much, however, may instead invest it in safer stocks to hopefully create a steady stream of returns. This isn’t a hard and fast rule, but is a useful starting point for thinking about stock market performance. Given that returns on the stock market are never guaranteed (even for those labelled less risky), it’s always wise to invest only as much as you are willing to lose.
THE IMPORTANCE OF LONG-TERM THINKING
One of the first things that many beginners in the world of stock exchange trading discover is that there is often a clear need to think long-term when placing trades. Stock markets are particularly known for performing at their best over the long term (i.e. over periods of years as opposed to months). As a result, it’s often recommended to place trades in a way that allows the market to overcome any problems and earn your investment back over time. That’s not to say that short-term thinking should never be a part of your stock trading strategies – and it may be that you can build it in successfully. It’s all about working out market performance and personal goals. If you analyse a particular market and note that it tends to bounce back after a few months rather than over years, creating a five-year plan may well not be appropriate.
To build an effective strategy that expertly handles these taxing questions of time and duration, you may want to backtest. Backtesting involves going back over previous market performance and working out how well a particular strategy would have performed if it had been in place at that time. This strategy is especially suited to the stock market, not just because it can help you deal with the question of time, but also because the stock market is full of relevant historical information – unlike cryptocurrencies, which may not have any available data.
Ensure you Have Access to Independent Data
If you are considering backtesting, you need to make sure you have all the necessary data in an accessible and easy place to make effective strategic decisions. For the large part, this will depend on your budget. There are plenty of free information providers out there who can give you the data you need to make decisions, and the Internet is full of stock market data for you to use. There are also some paid services that can give you even more information, such as newspapers like the Financial Times or dedicated information provision services like Bloomberg terminals.
In general, it's wise to avoid investing in stocks purely based on tips from an expert, friend or other person unless it fits into your pre-defined strategy. The problem with using tips given to you by others is that it can throw your strategy off-kilter. If, for example, someone recommends making a short-term investment, and all of your other investments are long-term, mixing ‘apples to oranges’ in this way could leave you with portfolio performance that’s hard to measure. Rely on independent data and information that can be used to inform your tactics, while following your overall strategy.
THE POWER OF ORDER EXECUTION TOOLS
Order execution tools are handy components of almost every strategy designed for use on the stock markets. Stock market traders can specify, for example, what sort of order type they would like to use. A market order permits the broker to buy the stock there and then, no matter what the market conditions are, while a limit order stipulates that a purchase should take place once the stock reaches a certain price. It’s also common for a trader to incorporate the use of a stop loss tool into their strategy. This allows you to stipulate a point at which your stock must be sold to minimise your losses as much as possible.
If you choose to use any of these tools, though, you should only use them as part of a defined trading strategy, not on their own. For example, if you’re following a procedure that involves allowing your stocks to temporarily decline in value, on the assumption that their value will later rise again, you shouldn’t feel compelled to put a stop loss on them just because it’s an available strategic tool. These tools should only ever be applied once your tactics have been worked out.
Top 3 Stock Broker Comparison
Automated Stock Trading: Is it Worth it?
Thanks to the growing power of the Internet in the financial and trading sectors, stock trading can – like so many other services – be automated. Two of the leading British providers of ‘robo-trading’, as it is known, are Moneyfarm and Nutmeg, and they offer a range of services designed to make portfolio creation as comfortable as possible. Although the software behind these platforms does the work for you, you can still retain control over what sort of strategy you want to follow.
- Automated stock trading – or ‘robo-trading’ – is becoming increasingly popular
- Nutmeg and Moneyfarm are primary UK providers of robo-trading services
- Robo-trading should only be performed if you consider it right for your strategy and personal investment goals
- Fees are levied on investments – and they may be high
You can stipulate the level of risk you’re comfortable with, and automated trading software has developed detailed methods for working this out. However, a strategy that relies on automated trading should only be pursued if you believe that it’s the right move for you. It’s also wise to remember that these firms charge fees, which will vary based on the provider, the size of your investment, and other factors. Charges aren’t usually too high, but for some more substantial investments, it may well be worth considering whether or not the fees are worth it, compared to the cost of your time if you have focused on building an investment portfolio yourself.
Relying on Others: The Right Tactic?
In addition to the new world of automated stock trading, it’s now also possible to borrow tips from trading professionals through the use of another technological development known as ‘copy trading’. Copy trading relies on a simple premise. Traders who have a lot of expertise, or who are particularly successful at their craft, can sign up to a website that connects them with newer or less successful traders who require assistance.
The trader can then choose to emulate the trading decisions of a more experienced and successful trader. If the principal trader makes a loss, so will the newer trader – but if the main trader profits, the new trader will too. The service is customisable, allowing newer traders to search for those who match their preferred trader profile.
To some new traders, this seems like an exciting way to circumvent the eternal questions of strategy, by allowing someone else to make trading decisions for you. However, it’s also important to establish your own strategic goals first. Do you want a risky portfolio to attract potential higher gains, or would you prefer to play it safer? Whether you’re trading yourself or you’re working with a more experienced trader to achieve your goals, you should always be sure that your strategic priorities are embedded into your thinking before you take the plunge and commit to copy trading.
Why Stock Trading Needs to be Strategic
Stock trading strategies are an essential part of buying and selling stocks, and they’re often the only way to give yourself even a chance of success. No matter which stock trading strategy (or strategies) you choose to use, you’ll always need to make sure that they suit your goals. You’ll also need to check that your chosen strategy reflects the instrument being traded. After all, it’s unlikely that an approach designed for the innovative and unusual world of cryptocurrency would accurately reflect the well-established pressures of the stock market, and traders need to take this into account. Meanwhile, traders who rely on short-term strategies need to ensure that they have other mechanisms in place to manage the drops in value that often occur on the stock market.
Traders who prefer low-risk investments should make sure they have tools in place that help them understand what makes an investment risky and what makes it a little more secure. Those who choose to make copy trading software a key part of their stock trading strategy should always ensure they develop their personal preferences first, rather than rely purely on the expertise of another trader. Ultimately, trading can be a rewarding experience, but it’s never a smooth ride – and traders should always think carefully about strategy before they decide to get started.