Have you been toying with the idea of trading as a new profession? You’re in the right place as this article reveals the basics of trading– what it is, how it works and how to make it work for you.
What is trading?
Traders actively participate in the financial market by looking for ways to outperform the traditional buy-and-hold investing. Instead of sitting still and waiting for profit, they look for opportunities in the rising and falling market.
They usually work on their own, very often from home. Traders get to set their schedule and achieve unlimited income potential.
It’s relatively easy to enter the field, making it a really desirable profession. However, while it may be easy to start trading, it is challenging to become good at it and succeed.
People who want to become traders for a living often overlook the emotional, financial and time commitments that are required to build a successful trading business. In fact, around 80% of day traders fail within the first two years of their operation. But, if you can come up with a strategy, you’ll have a chance at becoming a successful profitable trader.
Learn how to conduct a fundamental analysis
If you want to become a professional trader, you need to invest time in learning the basics of trading. Fundamental analysis is the central element of investing. There may be many different investment strategies, but the fundamental analysis is important to nearly all of them.
In general, fundamental analysis is a method traders use to evaluate security and to determine the intrinsic value of that security.
At the onset of their analysis, fundamental analysts assume that stock market may not be correct in the way it prices securities. When conducted accurately, fundamental analysis can unveil whether a security is underpriced or overpriced. Traders use that knowledge to make more informed decisions in their daily activities.
Most of the time, fundamental analysis is based on analyzing huge amounts of data points and sources to measure the intrinsic value of security.
What do fundamental analysts take into account?
- Macro and microeconomic factors
- Financial statements
- Figures that are linked to the target security
- Broader qualitative aspects of the company
Why is fundamental analysis so important?
The central objective of fundamental analysis is to determine the performance and general health of a company or security. Traders can identify strong companies and industries, thanks to fundamental analysis. That’s how they make long bets on strong names and short bets on weak names.
Some of the most critical aspects that are part of a fundamental analysis are closely related to the company in question. Fundamental analysts check whether:
- The company’s revenue is growing
- It’s making a profit
- The company compares favorably with competitors
- Successfully repays its debts
- Is involved in questionable financial practices that take place in its management
Investing time in learning fundamental analysis is a smart move because it will provide you with an accurate view of a potential investment’s value.
Once you know which factors you need to include in your consideration, you will be able to capitalize on the best opportunities. There are plenty of online resources that can help you learn the basics of that strategy. So, have a look around and educate yourself before entering trading.
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Is there a way to predict the stock market?
Sadly, there isn’t. What happens most of the time is the following scenario:
Prices continue to rise but investors are aware that correction can happen and the prices will drop. However, they don’t know when that will happen and what can trigger it. This is why most investors prefer to sit on the sidelines and wait for the right opportunity. There are others who are risk takers and will just jump in.
If you’re one of the traders who prefer to wait, when should you get in? And if you’re already in, how will you know if it’s time to jump in?
These are some of the essential questions traders consider in their daily job.
Now, the answer?
First, you need to understand that specific point where stock prices are fairly valued. Then, you need to gain knowledge about the events that may potentially cause the downturn. Finally, it pays to have an understanding of the entire decision-making processes.
What is stock valuation and how it works?
The price of the stock is dependent on market activity. For example, before deciding to buy or sell, investors compare stock prices. If the stock is being traded at $20 per share and its fair value is $25, it’s a good idea to purchase it. However, if the stock trades at $20 but its fair value is $15, the stock is overvalued and traders should avoid it.
How do you calculate a stock’s fair value?
There are different strategies to help traders come up with that figure. You can utilize the combined value of your company’s assets on its balance sheet and reduce it by its liabilities. Take into account the net value of its future earnings.
These methods will bring you slightly different results which is why it’s not that easy to know whether the stock is fairly valued, overvalued or undervalued.
Human decision-making process
This aspect is arguably the most interesting part. Every individual has emotional and logical components in their decision-making process. While traders can analyze the situation using their logical side, their actions may involve emotions.
When making an investment decision, investors usually process data before making any good bet. However, since it’s hard to know everything, there’s still a good chance for a bad decision to happen. It can occur even to people who have incredible analytical skills.
So, before you start on your journey, make sure to take the basics of trading into account. It will set you on your way to a solid career.