SPAC Info

The definition of day trading is “The purchase and sale of a position in an account during the same  day.” A day trading can be a short sale followed by a short covering also known as a buy.

A day trading refers to the practice of buying and selling financial instruments within the same trading day so that all positions are usually closed before the close of the market of that particular trading day. Traders who carry out day trading are referred to as day traders.

History of  Day Trading

Day trading has its origins in the birth of the computerized, over-the-counter NASD, in 1971. Fourteen years later, NASD created the Small-Order Execution System, or SOE, which made it easier for individuals to perform actions and tasks automatically, provided that the orders were for 1,000 shares or less. So, for day trading, with the use of phone lines, orders were placed in a matter of seconds instead of minutes.

The modern trade is no longer limited to SOEs. In fact, the most popular tool for the day trader today is the electronic communications networks, which are established to manage customer groups who make large blocks of stock trades. Thereby facilitating all members to trade directly with other members of their network, placing buy or sell orders electronically. Then, the electronic media has become an instrument of great help for day traders.

In the previous article, we already discuss three kinds of investing styles, growth investing, value investing and GARP investing. This article will continue the discussion of stock picking strategies by describing the final two stock picking strategies, fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis is a stock picking strategy whereby an investor or analyst tries to estimate the intrinsic value of a company based on financial facts. Although this strategy requires time and effort, it is more suitable for long-term investors.

Through fundamental analysis, investors seek to understand the trends of earnings of a company and expected future profits rather than market sentiments. In addition to revenues and earnings, investors also focus on factors such as, ROI (Return on Investment), ROE (Return on Equity), cash flows and P/E ratio etc.

Technical Analysis

Technical analysis, also known as chart analysis, is an investment strategy through which investors predict the future price movement of a stock based on past performance. Technical analysis mainly depends on supply and demand for particular stocks and trading volume.

Technical analysis is completely opposed to fundamental analysis. Technical analysts or chartists do not care much of the intrinsic value of the specific title.

Despite the advantages and disadvantages of each stock picking strategy, many investors are making millions regardless of the strategies they choose.

A choice of investors of a particular strategy should depend on its market knowledge, industry trends and potential for business growth. Above all, investors devotion of time and ability to calculate risk play important role in the choice of a particular stock-picking technique.

Effective stock picking strategies are vital for an investor to grow her assets significantly. An investors stock picking strategies depend on several factors including the performance of companies, market and industry trends, and share prices.

In this article we are talking about some of the stock picking strategies based on various investing styles.

Growth Investing

In this investing style, investors focus on fast growing company, with significant increase in revenues and profits. Investors who focus on this strategy aim to make money from the significant increase in the price of the shares of particular companies they choose to invest.

Normally, the profit from growth stocks are much higher than other types of stocks. However, the risks associated with this type of action are higher than others. Growth investors select young and rapidly growing companies, despite the expensiveness of these stocks, as investors bet on future growth potential of the companies.

The basic idea of growth investing may vary from sector to sector and company to company.

Value Investing

In this style, investors invest in value rather than invest in growth. Value investors focus on stocks that are trading below their intrinsic value. Value investors look at fundamentals of the company carefully and believe that the market undervalues these stocks.

Value stocks are cheaper than the net asset value of their respective companies. Value investing does not mean choosing  a low cost stock, but investing in undervalued stocks that have good growth potential.

GARP Investing

GARP (Growth At Reasonable Prices) is a combination of  value investing and growth investing strategies. Through the GARP investment strategy, investors focus on stocks that are reasonably priced  and at the same time has a strong growth potential.

In laymans terms GARP investors do not go for either growth stocks that are at high risk or low price stock prices, which are in difficulty. Thus, GARP investors avoid costly high-growth stocks. The important barometer for investors GARP is the PEG ratio, which is the PE ratio divided by growth.

When everyone you know is gossiping about the latest hot stock, it can be difficult to resist the urge to buy. Maybe your neighbor invested huge amounts in some fancy new bioethanol stock. Perhaps the newspaper is praising a certain company as “the next big thing.”  Regardless of where the stock tip comes from,  investing in stock tips can easily have negative consequences.

Following the hot stock tips is almost always a bad idea for a number of reasons. The first is very simple. Many stocks become hot because the company is liked by the people . Unfortunately, sympathy and financial viability are two very different qualities. If a company does not operate under a sound business plan, it will not do well in the long run, no matter how many investors put their money. The technology bubble of the late 1990s is an excellent example of that. During this period, it became relatively easy for almost all Internet-related companies to acquire funding. This has led to dozens of well-financed companies with business plans that do not actually include practical strategies for becoming profitable. While a few healthy companies pulled through, a large number of companies that went public during this period are no longer in existence.

While it may be possible to avoid the trap of accepting stock suggestions, there is an inescapable truth. Unless you know a person who is financially active and very literate, your ‘hot-tip’ will probably ‘stone cold’. Since stocks can be traded instantly, new information is reflected very quickly in the price of an asset. If you’ve heard a bit of stock in the newspaper, investment newsletter or a friend, there’s a good chance that many others have heard the same thing, and that the market price has already adjusted to these expectations. Although the stock tip you received was followed up by enough investors, prices could temporarily become inflated, causing even greater losses when prices readjust.

Despite the fact that most hot stock tips is not worth acting on, invest in individual stocks can be a fun and rewarding hobby for those who can afford the risk. Since hot stocks are so hard to choose, however, it is important to be aware of the true risks and significant. Do not be seduced away from sound investment principles to follow up the latest hot stock tip.

Fundamental analysis is one way of analyzing the value of a stock based on the economic health of the company issuing the shares, measured in terms of revenues, profits, assets, liabilities, Return on Equity (ROE), Return on Assets (ROA), return on investment (ROI), growth prospects and cash flows, etc.

The fundamentals tell you about the value of the company. You can say a company is having a solid foundation if it is growing at a nice pace, generating a profit, has limited debt and ample liquidity.

The analysis of the fundamental of a company always involves getting insight into its financial, rather than analyzing the movement of the stock price, the activity known as technical analysis.

Equity researchers normally do fundamental analysis to calculate the intrinsic value of the shares of a company. If  a company’s stock is trading above the intrinsic value or fair value, then the stock is overvalued. If the company’s stock price is less than intrinsic value, then the stock is undervalued.

If you follow the stock market very closely,  the price of the shares of most companies never matches the fair value. Often, day traders and investors prefer investment options in the short term, investing in these stocks, regardless of the outlook on the companies’ long-term growth. However, long-term investors generally prefer to invest in companies with sound fundamentals and ignore the short-term movements, the share price.