moneysalad.com

Tips for Trading In Equities

When it comes to equity trading, the word ‘tip’ is more often that not a ticking bomb. How often have you heard someone say, “Take it from me…? XYZ stock is definitely a pick. It’s running really hot right now”. Or someone who knows someone whose uncle works in a major brokerage firm and recommends a ‘sure shot’ tip for a stock. While these might be useful bits of information, it is important to understand that all of this information is secondhand. Doing some basic research on your own will allow you to understand the strength of the company and the viability of investing in their stock.

Equity trading is considered by many to be a cross between a science and the art of trading a company’s stock. The science lies in the research and analysis of the stock and the company in question. The art lies in the timing – when to get in and when to exit. There two ways of trading shares. The first is the long term investment approach where a stock is bought and held over a period of time with the (calculated and researched) hope that will give a healthy return sometime down the line. The second form of trading is done in the short term which is called day trading. This is where a company’s shares are bought and sold everyday to try and book profits. Day trading can be very rewarding. However, there is high risk that accompanies this high reward.

A critical component of trading regardless of whether you are trading for short term profits or long term investments is Research. A company’s record, its stability and profitability are vital bits of information that any trader or investor must look into. This is especially important for the long term investor as you want to park your money in a company that keeps growing and ensure good to great returns in the future. A company whose fundamentals are solid will definitely show the promise of profit down the line for the patient investor.

Here are a few tips to consider while trading in equities:

1. Keep an eye out for up coming, stable and profitable firms which are selling at low prices. For the retail investor especially, these are stocks which will give a higher return than the stocks of large corporations.
2. Research the Holy Trinity of any stock i.e. Share Price, Profit Margin and Earnings Growth.
3. Try and look for companies who have a larger insider holding which means the company owners have their own money in the company. This is a small way of ensuring that the company will strive to do better as their own money is tied into it.
4. Observe the cash flow from the company’s operations. Cash is required on a daily basis in order to carry out various operations in the company. A positive cash flow indicates the company is generating more money than it is using therefore investing in such a company is a less risky proposition.