The stock market is quite complicated and does not tolerate any mistakes. At least in the contemporary era of investment. While it was possible to make a consistent profit throughout history, multiple bubble busts demonstrated that we cannot either focus solely on investing in a stock or believe that the line will be going up forever.
The most recent market crash happened in 2008 and was caused by bad actors trying to play with speculative derivatives that were not backed by real capital. Just several years before that, we had the dot-com bubble when companies like Alphabet, IBM, and many others were simply overvalued. Today, we have a different array of issues with the stock market.
Fundamental analysis rules everything
One of the core differences between stock, commodities, indices, and a host of digital assets that you can trade is that the stock market does not follow the rules of technical analysis as much as speculative assets. The very idea of speculating on the price comes from the principle of technical analysis that all information is included in the behavior of the price since it is driven by traders who make their decisions based on fear, doubt, and personal interests.
However, the stock is a little bit different. Many publicly traded companies often make decisions that go against the grain and may be subjected to regulations imposed by the government. Their products may not be received as well as predicted. Many factors affect priced dramatically while not being directly tied to the financial market.
It means that you need to do your research and analyze companies on their corporate merits and the ability to be profitable and achieve good results in the future. The only reason why some companies start gaining on the stock market is that they make good business decisions ultimately triggering the reaction of the market.
Focus on learning the fundamentals
While some people still think that centering your attention on technical analysis is a good approach to understanding how to trade stocks and indices, the reality is that you must understand how publicly traded companies operate and make money. You need to read quarterly and annual reports. You have to browse through their publicly released documents and assess their products to know if you are making a good investment decision.
Several rules can be applied to trading stock:
- When working with companies that are referred to as blue chip (highly stable long-standing corporations), try entering only long-term market positions.
- Engage in speculative trade based on technical analysis patterns only if you are dealing with penny stocks and companies that are not valued that much on the market.
- Focus on corporate news and stories that unfold on a global scale to identify when it is a good idea to start working with a certain stock.
For example, you could be interested in the notorious Theranos at some point in the past. All market parameters were indicative of a continuous bull trend, but a couple of devastating investigations and revelations reduced the stock to the ground and completely demolished its worth. It was impossible to predict.
However, people who followed skeptics and dwelled on the meaty details of the technology behind Theranos knew that their product was a dream that would never have come true. When it comes to the stock market, you have to be conscious of how the real world interacts with companies that are represented by their stock.
There are ways to trade stock speculatively without ever working with exchanges like NYSE. For example, many online stock brokers carry CFD contracts in their catalogs allowing people to trade derivatives based on stocks and indices. However, the same rules apply here. When it comes to dealing with stocks, you cannot rely only on technical indicators.
It could be quite rewarding to trade stocks, but there are many nuances to this particular investment strategy.