Basics of stock market
Shares or stocks of companies are traded in the stock market. Usually they are traded openly on a stock exchange by investors via brokers or depository participants. Further, there are derivatives like futures and options contracts that can be used for more refined trading.
People who invest in the stock market are largely of two types – traders (whose strategies are short term e.g.: buying and selling a share on the same day) and investors (whose strategies are long term e.g.: buying and holding a stock for over one to two years). Today we look at tips on short term strategies in the stock market.
Useful strategies in the stock market
The key to making profit in the stock market is fundamental and technical research, risk-management and patience.
While there isn’t any one definitive answer to the question of how to make money in the share market, there are a few, widely respected principles that can be followed to improve one’s chances of positive returns :
Understanding your trades: In order to make an informed trade, the trader needs to be aware of the following before they start trading with short term strategies:
- The core business model of the companies in particular sectors and its affiliates
- Overall macroeconomic conditions in both the economy and the particular sector
- A small set of financial ratios to assess the short-term financial health of the companies quickly
- Short terms business strategies of the company and its peers
Such information can be obtained from the following sources:
- Financial newspapers and reports (perhaps from a trusted broker like Angel One)
- The websites of companies and exchanges
- The company’s balance sheets, annual and quarterly reports and prospectus which are often available online
- Macroeconomic reports on economy and policy
Knowing when to quit : Every investor’s dream is to buy when prices are low and sell when they peak, however realistically this isn’t usually the case, especially in the short-term. Deciding to liquidate an investment after periods of good returns may be a better choice rather than waiting for them to peak as there is always a risk of things going south especially when soaring stocks often correct themselves by the end of the day.
Building a diverse portfolio : Investing funds in a variety of securities across many sectors is a good method of compensating for potential losses in one area. Hedging is a common method of achieving this by investing in competing or contrasting organisations and sectors so that losses sustained from one are offset by the gains achieved by the other. Large cap stock enterprises are a good source of steady returns while mid caps may or may not yield high gains. Small cap shares enterprises should only form a small part of your portfolio as, despite potentially high yields, they are a greater risk in the long run.
Choosing strong companies: The hack for short-term investment is that you should target strong companies. Investors with a short-term perspective will always have some options available to them.
The amount of money you make from stocks in a month depends on basically three factors:
- The amount of capital you put in
- Number of trades you make (including for diversification)
- The amount of risk you take
While stock markets are a good opportunity to make money, an investor must be prepared to do the groundwork themselves and set aside a chunk of capital that they are willing to invest without financial difficulty before they start investing.