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When you start trading, it’s essential to know which financial assets to focus your time and energies on. Investing in stocks hugely popular with both experienced and novice traders and is one of the most accessible form of trading.
Investing in stocks is usually about owning shares issued by companies and corporations in the hope that their value will increase. You can also invest in stocks using derivative products such as CFDs (Contract for Difference). This means you don’t need to own the actual shares, but can still take full advantage of price changes – both bullish, upward movements and bearish, downward trends.
Regardless of how you decide to trade stocks, it’s important to follow several steps to ensure you’re trading under the best conditions.
Which type of trader are you?
The first thing you need to think about before trading stocks is yourself.
You should know as much as possible about your own personality, as well as your strengths and weaknesses, to in order to find the investment style that suits you best.
There are many different kinds of traders, including day traders, swing traders and position traders, each relying on different analytical methods and each suiting people with certain character traits.
You should start by asking yourself a few questions to determine which kind of trader you are.
How many hours per day or week can you spend analyzing the markets? Are you able to handle stress? How much are you going to invest? How much risk can you take? Will you use leverage to increase your capital, risk level and potential profits? What are your financial goals? Why are you trading?
What type of market analysis will you use?
Once you know which type of trader you are, you need to choose the appropriate stock analysis method.
There are 2 main types of analysis: fundamental and technical.
Fundamental analysis is about determining the intrinsic value of a stock by looking at economic factors and real company numbers to determine if the stock is undervalued or overvalued.
For instance, you will have to look at seasonal variations affecting the industry you’re investing in, its current and expected level of global growth, the potential impact of political events, and the bearing that currency fluctuations could have.
Factors affecting the company itself include revenues, overhead, growth prospects, the competitive environment, the strength of the management team and current R&D projects.
Technical analysis, on the other hand, evaluates the value of a stock purely according to its recent market activity. It’s all about spotting trading opportunities from trends and patterns in price movements.
Now you understand why it’s important to know which kind of trader you are before investing in stocks, as this knowledge will help you use the best investment method for your needs.
Fundamental analysis is generally used by traders with long-term investment strategies. Because technical analysis looks at short-term price swings, it is more appropriate for active traders who like to make fast gains thanks to leverage and margin trading.