Investment timing is EVERYTHING. When you sell and when you buy will decide whether you make or lose money. Learning about timing is crucial to success as an investor.
The stock market is where experts invest their money. It's where your insurance company invests your monthly premiums. It's where pension funds invest.
Investing in stocks and shares has become easier with the rise of internet brokers that offer trades-only services (Advice and analysis not included.)
Common asked questions about trading stocks would be:
- Would it be best to start with traditional stocks trading or small trading such as Penny Stocks? It depends on your trading knowledge and it's also up to the amount of money you'd be willing to spend.
- Should you go for Premarket trading or just regular day trading? That's up to whether you're an early bird and what's the risk level you're willing to take.
- Could you make profitable investments on the stock market? You could, but you must first decide the level of risk you are prepared to take. The strategies that have the highest profit potential also come with the highest risk of making a loss.
Well, you have a choice of two strategies.
1. Buy low. Sell high - High risk
2. Invest a fixed amount at regular intervals - Low risk
Buying Low and Selling High
If you had a time machine, you could implement this strategy to perfection.
In real life, nobody, and that means nobody, can tell for certain when a given stock price has reached a minimum or maximum.
Company shares prices move up and down for many reasons such as: currency movements, inflation, and world events as well as news about the company.
That said, there are charts you can use to help predict future share prices. Understanding these charts is the key to reducing the risk attached to short-term investing.
Moving Averages
Moving average charts are easy to understand. They smooth out the random peaks and troughs of daily trading and make it easier to identify trends.
There are two types of moving average:
- Simple moving average (SMA)
- Exponential moving average (EMA)
A simple moving average chart averages the prices for each day in the chosen time period. An exponential moving average gives more weight to recent prices. An EMA responds more quickly to price movements, so is better in many ways.
Many investors track two moving average charts for shares they are thinking of buying. 50-Day and 200-Day charts are common choices. If the 50-Day moving average share price crosses and moves above the 200-Day average, it is seen as a buying recommendation. When the short-term moving average share price crosses and moves below the long-term moving average, it is seen as a signal to sell.
StocksToTrade.com has an excellent discussion of Moderna stocks that includes moving average charts and drawing trend lines from them.
This USNews.com discussion of Greenbrook TMS stocks is an excellent illustration of how a simple moving average chart lags day-to-day price movement.
Regularly Investing a Fixed Amount
The generally perceived wisdom is that it is safer to invest a set amount at regular intervals, regardless of whether the share price is falling or rising. This is how endowment insurance policies work - The policyholder makes a monthly payment from salary each month that buys shares; more shares when prices are low, and fewer when prices are high.
This process is called pound-cost averaging (PCA).
PCA is a low-risk strategy. You might miss out on some profit, but you increase the probability of making some profit.
You must have an investment strategy and stick with it religiously. Invest the same amount every month, regardless of the amount of doom and gloom in the financial press.
You can tweak pound-cost averaging by increasing your regular investment when prices are down. This increases your risk but offers the possibility of larger profits.
Pound-Cost Averaging Vs. Lump-Sum Investment
A Vanguard.com study reported in MorningStar.co.uk found that lump-sum investment worked out marginally better two-thirds of the time and that that advantage increased when examining longer investment terms. The report confirms that share prices have consistently beaten inflation over the long term.
The report did find that regular share purchases worked out better than bulk, one-off purchases when the market was going down.
What Can Go Wrong?
An uneducated investor will often buy when he or she sees shares doing well (Thinking, "Shares are a great idea.)", and sell when they hit rock bottom (Thinking, "Buying those shares was a stupid decision.) - The exact opposite of a profitable strategy.
Most investment decisions are emotionally driven because they are made by people. Emotions are not a good predictor for success.
Charts are historical records of past stock purchases and sales. They are not predictors, and using them to make predictions is a gamble, not a strategy.
Charts are public knowledge, available to millions of investors worldwide. If you think you have identified a trend that everyone else has missed, you are wrong.
Where Do You Start?
1. Assess your risk profile
Never invest money you cannot do without. Stock market profits may take years to materialise, so be prepared to tie up your cash for at least three years and preferably at least five years.
2. Research how stock markets work
Read the Financial Times in your local library. Check out the financial pages in your daily newspaper.
3. Learn to read moving average charts
Random daily movements make the big picture difficult to read. Moving average charts are the key to identifying trends and making good buying and selling decisions.
4. Look at virtual trading accounts.
You will make mistakes. Errors of judgement are inevitable as you start your investment strategy: Much better to make mistakes with pretend money than the real stuff.
