Share trading is a complicated process and every trader will go about it in his or her own way. As a generalization, all investors have some things in common however. Usually they have a number of rules or steps they follow religiously.
Step 1. When you start investing in the share market you need to know your time frame and investing strategy. This strategy is what dictates the stocks you will buy and when you will buy them.
For example, long term investors would establish a strategy around finding shares in companies with long term competitive strengths and a history of stability when it comes to growth. Because they are buying with the long term in mind they would look at historical trends over past decades and analyze the businesses strengths and weaknesses.
Shorter range investors might consider some of these alternatives:
a. Momentum Trading Strategies: these strategies are based on recent analysis of a stock’s price and volume. It is a common strategy for short term investors. It works by looking for stocks that have been consistently rising in price in a smooth fashion and where there is an expectation that at least for the short term, this will continue to happen.
b. Using Contrarian Strategies: Contratrian strategies look for stock market over-reaction. The stock market is not efficient and so the value of a stock isn’t always a true representation of the value of the company. In a situation where a company makes an announcement, particularly when the news is bad, panic selling ensues and it isn’t uncommon for the price to fall below fair value. Contrarian strategies involve finding stocks that have had recent sharp falls and analyzing the possibility of a reversal. Candlestick analysis is often used in this strategy.
Step 2. You should use a form of software that has filters to narrow down your research. Many types of online programs and downloadable software can screen in or screen out different types of stocks according to your criteria. This makes the process of concentrating on your timeline and price much more efficient.
Step 3. Put into place a diversification strategy. There are many ways you could diversify your portfolio. One example is Markowitz analysis. This is a tool to help you identify the proportions of each stock to buy in one portfolio. Making sure you have diversity in your portfolio is essential to minimizing risk and loss.
The three steps I’ve outlined are just preliminary considerations for traders new to the stock market. You should make it a priority to continually improve your education about financial markets so that you can expand upon these basic steps. Doing so will make sure your confidence and success continue to grow.
James Spacey writes about a variety of topics including building commercial insurance and the penny stock broker. Check here for free reprint licence: Three Principles For Finding Stocks For Profit.