Nearly 80% of Retail Investors lose money in the financial markets. Here are 7 tips to help you avoid being part of the 80% who lose money and get you closer to the 20% who do make money in the financial markets. Plus a Bonus Tip at the end…
- Decide on How Much You Want to Risk
- Decide on the Type of Investor You Want to be
- Assess the Market
- Identify a Sector
- Narrow Down The Search
- What Sets a Stock Apart
- Dive into The Charts
- Bonus Tip
1) Decide on How Much You Want to Risk.
Remember, that there are no guarantees when investing or trading and anything can happen at any time. Whatever the amount is that you decide to invest into the markets, treat it as tuition or the cost of participating. Investing or Trading is not less different than running a business.
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Investing in growth stocks can provide higher returns but can also be volatile (especially during the short term), which increases a portfolio’s risk exposure. Long-term investing is less risky because the increases in the broader stock market tend to outweigh the short-term slips.
This is why the terms long (buying) and short (selling) are used. Markets tend to move up for longer periods of time and tend to go down for shorter periods of time.
There are generally 3 types of investors: Wealth Preserving who are more conservative and are looking to simply outperform inflation and steadily grow their wealth without taking on too much risk. Income focused who are looking to make a passive income while minimizing risk. Capital Appreciation who are more aggressive in their investment approach.
Wealth Preservation Investors tend to have a lower tolerance for risk. Stable blue-chip corporations are primarily in their portfolios. These may include consumer staples and companies that do well in good and bad times. Could be termed as “recession” proof companies.
Income Investors focus on buying (and holding) stocks in companies that generally distribute higher dividends. These are often solid but low growth companies in sectors such as financials or utilities.
Capital Appreciation Investors are investing in companies that are in their best early growth years. They accept the higher degree of risk for the chance of higher returns.
You don’t need to pick one or the other, many investors choose a blend of each category as part of a diversified portfolio. The key here is risk management and looking for opportunities of growth without being largely exposed to market fluctuations. Fluctuations that can cause severe draw downs in one’s equity.
Before you consider a stock, see how the broader market is behaving. Roughly 75% of stocks move with the market. Similar to a rising tide that lifts all boats, investing in stocks during upward market trends may increase your odds of success.
You may want to also consider the major index’s moving average (MAs show the broad trend on a chart over a given period) as this serves as a guide to the market’s momentum. If your trading time frame is one month or longer, then you consider the 50-day moving average (or 200-day) in order to gauge the market’s general direction.
Keep an eye out for market-moving events that could affect your trade, such as earnings announcements, government policy changes, and employment reports.
4) Identify a Sector
Once you have an on the market’s general direction and momentum, the next step is to focus in on sectors and industries that have potential. Out of the main sectors below, you want to see which have performed well in recent months.
- Energy
- Materials
- Industrials
- Consumer Discretionary
- Consumer Staples
- Health Care
- Financials
- Information Technology
- Communication Services
- Utilities
- Real Estate
5) Narrow Down The Search
It’s now time to pick the stocks, the fun part right? There are three simple ways to do it:
Find the ETFs (Exchange Traded Funds) tracking the performance of the industry of interest. Head over to their homepage where, you can see the stocks they’re investing in. Simply search for the industry of interest followed by “ETF” where you will get the results. Alternatively, you can view this comparison.
Use a screener to filter stocks, using criteria such as sector and industry. Screeners can also offer additional sorting features such as market cap, dividend yield, performance, and more. You can use the screener below.
Stock screener by TradingView
Search the blog verse, stock analysis articles, and financial news releases for commentary and analysis on companies in the investment space you’ve targeted.
If these seem a bit time consuming and you’re looking for a shortcut, then try copying successful investors instead.
6) What Sets a Stock Apart
Now that you have your list, it’s time to go deeper. First, check the commentaries surrounding each company. Look for red flags such as recalls or any legal suits/litigation against the company that could affect the price negatively? On the flip side, are there factors such as a new product or possible mergers/takeovers that could result in a rise in the stock price?
The idea here is to look for any glaring information, basically sore thumbs that can make a stock stand out. For better or worse. There’s no need to go in too deep and look at every little detail, this will most likely drive you nuts.
7) Dive into The Charts
Technical analysis is a popular method for picking stocks for short-term trading. It relies primarily on past price performance to predict possible future moves through technical indicators and chart patterns. There are three underlying assumptions:
- That markets (prices) account for all relevant information about a stock
- That prices move in trends rather than erratically
- That these trends tend to repeat themselves over time.
Technical indicators can help an investor decide on possible entry and exit points. Breakout stocks for example, are those that move beyond a certain price level commonly known as support and resistance. Feel free to do your own research below, you can change the stock by clicking anywhere on the chart and type in the ticker or company name.
Breaking a resistance level may attract more buyers into the market, leading to a further increase in price. While breaking a support level may attract more sellers and bring a stock’s price further down.
Technical analysis also looks at chart patterns, such as candlesticks, or geometric shapes which can provide clues of future price movements. A simple search using the term “chart patterns” or “candlestick patterns” will lead you to some popular examples.
8) Bonus Tip - Requires You to Watch the Video Below
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