Traders and investors often seek out nuggets of information about how best to dabble in the stock market. Get rich quick schemes exist, but they come with the caveat: You get poor quickly too. As the age-old saying goes, easy come easy go. Fortunately, there are tried and trusted techniques that can be employed to boost the success of your trading and investment activity.
As a newbie or veteran stocks trader, it’s important to understand market mechanics, and market dynamics at all times. What is it that drives the value of a stock up or down? When is the right time to buy a stock? What stocks should you buy? These are all pertinent questions that require methodical analysis. Let’s explore the current state of the US economy, and the bourses to determine where we’re at in the broader scheme of things:
- The Dow Jones Industrial Average is hovering around 23,900, with a 16.45% gain over the past 1 year
- The S&P 500 index is trading around 2,600 with a 12.43% gain over the past 1 year
- The NASDAQ composite index is trading around 7,100 with a 22.32% gain over the past 1 year
These performance figures indicate that stock markets are performing strongly, despite the 1 month declines we are seeing on major bourses. As an investor, it’s important not to get distracted by short-term trends. However, as a speculator or a trader, it’s the short-term trends that mean everything. Let us put things into perspective: The goal of investing is a long-term appreciation of your capital, i.e. your investment.
Investment timeframes vary from one person to the next but are typically a minimum of 5 years. From a trading perspective, anywhere from minutes, to hours, to days or weeks is the norm. Trading has a short-term focus and relies heavily on price fluctuations from day-to-day. There are many reasons why stock prices fluctuate, including geopolitical uncertainty, interest-rate announcements, economic indicators, dollar strength/weakness, company performance figures etc.
How Do You Account for Stock Price Fluctuations?
Remember that the stock market is not a homogenous agglomeration of stocks. There are distinct types of asset sectors to choose from. These include consumer discretionary companies, consumer staples, energy stocks, financials, healthcare, industrials, materials, technology, utilities and so forth. Each of these sectors has a unique combination of stocks and factors that determine stock prices.
For example, one of the hottest stock categories in 2018 is financials. There are many reasons why financials rank among the most desirable stocks at this time, notably rising interest rates, deregulation, and the tax overhaul. The trifecta of factors is like the perfect storm for buying into financial stocks like Bank of America (BAC) Citigroup ( C ), Wells Fargo & Company (WFC) etc. Every time the federal funds rate increases, banks enjoy benefits.
Banks make their money from the difference between interest rates they pay on deposits held at the bank, and interest rates they charge on lines of credit they issue to their customers. This spread increases when interest rates rise. One of the better performing bank stocks in recent months has been Bank of America Corporation. Banks have been the biggest beneficiaries since Trump was elected president.
And there is good reason to go long on bank stocks moving forward. The Fed announced that it is likely to increase interest rates at least 2 more times in 2018, an auspicious sign for bank stocks. Other prominent financial stocks to watch include ING, BNP Paribas, HSBC, and Exor. It can get a little overwhelming at times, trying to understand how best to dissect the market and understand the technical and fundamental factors that govern its functionality.
Fortunately, there is a great “stock market for dummies†guide you can consult to break it all down for you. It goes to great lengths to provide insights into the stock market and all the tools you have available. For example, stocks can be purchased and controlled in so many different ways, including outright purchases of individual stocks, mutual funds, EFTs, limited partnerships index funds and the like.
It’s worth taking the time to understand your investment options before simply jumping willy-nilly into the financial markets. Your risk profile, resources, and investment horizon play a big part in how you approach the financial markets and how much you can profit from them.
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