3 Reasons to Trade the Stock Market
Passive investing strategies like buy-and-hold isn’t a very good strategy. However, considering stock trading can potentially achieve greater returns. There are 3 reasons to trade the stock market instead of investing in the stock market.
Achieve Greater Returns
The profit potential can be better by learning how to actively manage your investments than just investing. With investing, you’re advised to buy at whatever the current stock price is and then wait forever to profit. That may seem like an over-simplification but think about it for a moment and analyze the current investment dogma peddled by most financial advisors. “It’s a good company…if you liked buying this stock at $25 then you’re going to love buying it at $10…invest for the long-term…don’t worry about bear markets, just ride it out and you’ll be glad you did in the end”.
Comments like these are more cliche than sound investment advice. Digging just a little deeper and you’ll see the offer little substance.
What qualifies a company as a “good company”? Why would I love buying a stock that is losing value? When does a good investment turn into a bad investment? More, how do I control my risk? What does “long-term” mean? How is that going to control my losses or risk?
Trading involves looking for price trends and then buying into that trend at the right moment. More emphasis is on price movement rather than buying randomly. In trading, buying and selling is strategic. Using a set of criteria for finding trades followed by a set of rules to guide your trading decisions.
That said, you don’t have to be in a position “forever” but only when the odds are on your side. Following a sound trading plan with focus and discipline can you potentially achieve higher returns instead of the meager 8 – 10% average annual returns from the stock market.
Know When To Buy and Sell The Stock Market
Trading involves more than chasing price trends and jumping in and out of positions. That’s not the way to achieve greater returns and can end up leading to ruin, not profits.
Successful stock trading involves having a trading methodology that matches your personality and your goals as a trader. Once you have that in place, then you’re trading system will have a set of criteria for finding winning trades, when to enter, and how to manage your position.
When all these pieces are in place you have a workable framework to trade the market.
(In the video below, you’ll get a few key lessons on trading the stock market.)
Learn To Control Your Risk
Nothing is riskier than buying a stock and blindly holding it forever. This is like sleeping on the railroad tracks and hoping that a train doesn’t come along. Hope is not a strategy for coming out ahead in the stock market.
In trading, controlling risk is the primary focus and where the pros focus all their energy. By managing your risk through a successful method that matches your personality and your goals you will better control your risk.
Any number of things can happen to a stock.
Years ago, a company called Enron was telling its employees to keep buying its stock even when management knew the company was in trouble. In fact, they were encouraging Enron employees to buy the stock when they were selling the stock themselves!
Any number of natural disasters, terrorist attacks (i.e. the 9-11 attacks), a housing crisis, recession, stock market bubbles, and more can negatively impact the stock market. If you’re holding a big position at those times there is no telling how devastating such an event can have on you financially. Many investors are still trying to recover from the Housing Crisis of 2008 that almost took down the entire global economy.
With the volatility of today’s stock market in such a state then knowing when to be in the market and when to be out can help you control your exposure than just trying to sit it out.
Wrapping It Up
In closing, even if you don’t want to be a trader you can still be a much better investor by learning how to think and analyze like a trader.
Warren Buffett is a good example.
Buffett analyzes potential investments using a strict set of criteria including buying excellent companies at a price that he determines is a value, has excellent management, is insulated from risk in its marketplace, etc. These criteria are the setup condition for him to even consider buying into a company and the trigger to enter is at an excellent price with a strong margin-of-safety. And, during the whole process leading up to this point, Buffett is focused intensely on controlling his risk through this process and avoiding losses.
But, modeling his success can help you get much more out of the stock market while avoiding being at the mercy of it.