Learn to Trade the Market: Some Basics for Brand New Stock Pickers

learntotradethemarketDo you have your money working for you? Maybe you have directed some investment dollars toward mutual funds. Perhaps you have even seen some decent results with that, provided you didn’t take a major hit when the market derailed in late 2009. And yet, if you are like many, you might be thinking you can get a higher rate of return in the market by picking your own individual stocks.

You could be right. Many have found success with a portfolio of individual stocks chosen with care. But here is the thing: if you are going to beat the market, you need to commit some time to it. You’ll need to learn to trade the market based on principles and keep a close watch on your investments. You might start learning the basics with a course covering the essentials of investment markets, including the stock market.

Ready to get going? OK. Take a look at these basic concepts in stock trading to start learning how you want to approach building your portfolio:

Value and Growth investing

In individual stock picking, there are various schools of thought. But the two major approaches that are most often classified (and from which other strategies draw) are these: value investing and growth investing.

Value investing gets a lot of celebrity attention for being associated with arguably the world’s most famous stock market investor, Warren Buffet. In essence, the logic of the method runs that certain company stocks are priced, in the short term, at a point lower than their long-term intrinsic value. The reason for this is that the market sometimes acts irrationally over short-term news related to a company. Knowing a price is artificially low and will eventually correct itself, the value investor swoops in to buy the stock at a discount. Ideally, the investor then sells the stock when it is fully valued or overpriced.

There are classic strategies for identifying instances of this, and there are virtually endless variations, so a value investor has many opportunities to keep learning. You can begin to learn how to find value investment opportunities in an online course on principles of value investment.

Now, just because a strategy works for Warren Buffet, that does not guarantee it will work for you. It could be that the other major school of thought, growth investing, is more convincing. And perhaps it will help to know that Warren Buffett’s mentor, Benjamin Graham, is often cited as the father of the growth investment style, as ironic as that may be.

In short, growth investors are not so interested in a stock’s current price and whether it is selling at a discount. Instead, they take an approach to investing that predicts a stock’s future value. This will lead them to buy a stock at a price that would make a value investor cringe.  But they do this because they believe the long term investment will create an average return that is higher than the growth of the overall market.  You can learn this method of investment with an online course covering the basics of growth investment.

If you come away from this explanation of value versus growth thinking they are not mutually exclusive, you are not wrong. Many investors take one approach or the other, or sometimes they use both in different circumstances, to find plenty of opportunities and to diversify their portfolios. But others combine elements of both methods to find a shorter list of potentially great stocks.

Capitalization

In the eyes of the stock market, companies come in different sizes. The overall valuation of their stocks is referred to as their market capitalization, and capitalization is divided up in to groups based on the size of this number. There are technically six groups, but to get the basics down, you can shorten it to three: small-cap, mid-cap, and large-cap

Small-cap stocks are those valued at $250 million to $2 billion; Mid-caps are valued at $2 billion to $10 billion; and large caps are over $10 billion. And one of the major reasons you want to pay attention to these groupings is that they speak to the amount of risk vs. reward an individual investment will offer.

Small cap companies often have less public history and less information on which to base an investment decision. Their products may have yet to win over the hearts of consumers; their management may not be very well known. These and other factors make them risky, but they also mean their value could skyrocket.

Mid-caps have potential for growth and still include some possible big winners, but they are a bit safer and easier to evaluate. With large-caps, the company is well known and heavily analyzed. This means it is easier to make a safer investment, but the reward is less likely to beat the market.

Many will tell you it is wise to diversify among capitalization sizes in your portfolio and aim for certain percentages of each based on your risk tolerance.

Financial Statements

To evaluate stocks, you are going to need to understand a company’s past performance, and the way to do that is to access their financial statements. You can find these documents filed in a company’s annual (10k) and quarterly(10q) reports. With whatever approach you take, you will get the numbers for your evaluation from there.

Fortunately, this information is publicly accessible and easier to find then you might imagine. Major sites such as Yahoo finance and MSN money have links to corporate report filings that are fairly easy to navigate to from a company’s main stock quote page.

But of course, once you find them, you will need to know what you are looking for. An instructor in any given stock method will point you to specific indicators within the reports, but you might get a significant advantage from really understanding the data. If you want to take a deep dive into a company’s numbers, you can learn how in an online course covering the interpretation of a company’s financial statements.

Summary

Picking your own stocks can be a fun, exciting, and profitable experience if you take some time and learn to trade the market well. Remember to start out small and resist speculation that isn’t backed up by solid data. Once you get down the basics of investing principles and know what to make of a financial statement, you should have the basic building blocks to design a strong, market-beating portfolio.