“Look before you leap”, is how the saying goes. In stock trading, the relevance of this principle is greatly amplified. Many investors, both big and small, are drawn to stock market trading because of the positive results that it promises to bring. More often than not, the returns are quite substantial, provided you know how to play the game.
However, this doesn’t mean that you can dive right into the deep end without putting much thought into your trading decisions. It’s important to remember the basic fact that stocks trade in a very volatile market. The days alternate between good and bad without much prior warning.
One of the ways for you to stay prudent in your stock trading decisions is by carrying out initial research. Before arriving at a final decision, you must back up your choices with research that supports your actions. Also note that stock trading isn’t as simple as playing with numbers. It’s a complicated process that necessitates intensive research to make an informed decision. This means that these financial decisions are not to be made in haste.
That being said, read on to learn more about how academic research can help stock traders:
1. Gives You An In-Depth Idea Of The Best Types Of Stocks To Own
When you gain more exposure to finance and investments, you’ll find out that there are many different types of stocks that an interested buyer can choose from. Each of these stocks has its respective pros and cons, so the choice may eventually boil down to a matter of personal preference. But there are certain types of stocks that are referred to as some of the best to own. You can get to know more about these stocks through academic research.
To provide a brief background, some of the best types of stocks to own are the following:
- Defensive Stocks
These are the types of stocks that don’t fluctuate too much in value even when the economy is in terrible shape, for the simple reason that they are consumer staples. These stocks are some of the best to own because they provide a sense of stability and a constant dividend. In basic terms, these stocks aren’t dependent on the economy because they are need-based. Typical examples for these are stocks of utility and food companies.
The only downside to this type of stock, however, is that while it may provide you with a sense of stability, you can’t expect dramatic growth or big dividends. Whatever you will earn from these kinds of stocks often stays constant.
- Growth Stocks
These are the types of stocks that an investor buys in order to grow capital and not to get dividends. Generally, these types of stocks belong to companies that have positive cash flows, with above average growth on earnings.
An excellent example of this type of stock is the one for real estate. You buy the stock or the asset itself, hold it, and let it grow in value. In the first few years, you may not see any dividends or profit from this type of share. But if you hold it safely and avoid the pitfalls of real estate stocks when the value of the stock itself rises, you’ll have other investors running after you to buy their shares too. That’s when your earnings start to climb up.
- New Issue Stocks
These types of stocks are also referred to as Initial Public Offerings. This means that they are fresh on the market, and have just been opened up to the public. A great advantage of this type of stock is that they’re often sold at a low and discounted price, as they’ve only just been offered to the general public. Hence you’ve got more leeway as the stock owner to hold it and let it grow to make the most profit or receive higher levels of dividends.
- Dividend Or Yield Stocks
Dividend or yield stocks refer to the shares from companies that are continually performing well. They are more readily available to the big investors as, generally, these types of stocks are more expensive to purchase. They are also the commonly favored choice of investors that are looking to earn a good income. An excellent example of these types of stocks are those offered by telecommunication and banking institutions.
Read more here to learn about the most profitable types of stocks that you can own as a trader-investor.
2. Teaches You How Best To Study A Company’s Portfolio
Before you jump right into choosing which stocks to invest in, you need to do a lot of studying. One of the most important aspects for you to consider is the portfolio of the companies that you’re looking to buy stocks from. What aspects of the company’s portfolio should be studied? What are the red flags or telltale signs that a particular company may prove to be bad news for now? Insights gathered through academic research can help you in this decision-making process.
Here are some aspects of the company’s portfolio that you should pay close attention to:
- Company records
- Performance ratings in unpredictable markets
- Operating structure
- History of the company’s management
Learning more about a company is crucial to avoid making the mistake of buying stocks from a company that’s already buried in debt. There might also be companies with insufficient cash flows. Because this is your hard-earned money, you’ll want to make every decision with the maximum possible care. That way, you can avoid pitfalls like the following:
- Declining revenue
- Management turnover
- Negative cash flow
3. Enables You To Learn More About Stock Analysis
Stock analysis is another vital skill to master once you’ve decided to get into trading stocks. The more that you learn about analyzing stocks efficiently, the higher the chances that you’re going to find profitable stocks. After all, you don’t want to put your hard-earned money in an investment that doesn’t hold water.
Stock analysis refers to the method used by traders to evaluate the current stock market. In other terms, this is also referred to as equity analysis or market analysis. Through your learning in academic research, you will come across the best ways to analyze stocks. Some of these include the following:
- Technical Analysis – This refers to the act of studying the supply and demand of shares within a particular stock market. Investors that use technical analysis to analyze stocks pay special attention to the historical performance of these stocks. This is because they believe that its history plays a significant role in how these stocks are going to perform in the future.
In technical analysis, you should learn how to make use of charts, trends, and market patterns. You can even learn more about matters such as stock finance, bonds, equities, and other related concerns.
- Recommendations By Analysts – Stock and investment analysts are also referred to as the experts in this field. They know what they’re doing, and they do it so well that investors also rely on recommendations made by these analysts to arrive at their decisions.
But this isn’t to say that you should listen to all recommendations. Through what you’ve learned in academic research, you’re also better able to determine which proposals are trustworthy and which are not.
- Price To Earnings Ratio – This refers to the act of studying how the price of a particular stock relates to its potential earnings. If the potential to earn is too low and the price is too high, then this may not be a good stock to invest in. It means that you’re faced with too high a risk, with a longer time-frame for earning profits and dividends.
- Return On Equity – Through your academic research, you’re going to learn how well a company generates positive returns for its shareholders. This means that you’ll learn to find companies that generate the most profits. This fact will help you filter through all your stock options as well.
- Earnings Per Share – This refers to analysing how effectively the revenue is flowing to the investors. As a future investor, you’ll want an assurance that you’re going to earn a good and stable income. When a company’s earnings per share ratings are high, this also means that your shares are going to be worth more. This will turn out to be a good sign for investors like yourself.
- Book Value – This refers to the method of analyzing stocks to determine a company’s price-to-book ratio. This is often the means for investors to learn more about stocks that they feel are undervalued.
4. Focuses On Learning About Market Values
Another crucial facet of trading that you must understand and master has to do with market values. This refers to the present value of the stocks today and the possible rates of increase or decrease in the coming days and months. The market value is also referred to as the requisite price if you decide to purchase the stock. This value is the price that you have to pay to own the shares. Through research, investors or stock traders learn about the future viability and strength of the current stocks that they’re holding.
5. Teaches You How To Invest In Profitable Stocks, Like Equities
Apart from stocks per se, you should also have enough knowledge about other “soft” investment options for stock traders such as equities. You can also learn more about this through your insights derived from academic research. Investing in equities means that you’re choosing equity funds. It refers to the funds that are invested in stocks, also referred to as equity securities. This is a way for you to balance your assets in stock and cash, as opposed to bond funds and money funds.
When choosing to invest in equities as a trader, here are some tips to remember:
- Always conduct a thorough analysis
- Do not invest more than 10% of what you’re going to allocate for stock trading in one single company
6. Gives You Information On How To Be A Competitive Trader
Is there competition in stock trading? Most definitely so. Just like any other industry, this is also geared towards the business of profits. Hence, in essence, you’re competing with all the stock traders in the establishment and the stock market. When prices are projected to decline in the days ahead, you also have to learn how to get ahead of the competition by playing with your stocks so that they do not feel the loss in value.
Through academic research, you can learn more about playing competitively with your stocks. You’ll be able to understand essential factors such as the current and projected market value, the positioning of your company’s stocks versus those of other direct competitors, and even the age of your shares.
7. Teaches You In-Depth Insights About Trading
Yes, you may have wanted to be a stock trader for a long time. But are you sure that you’ve got enough in-depth knowledge of all that you need to learn to be successful in trading? Before you part with your hard-earned money, you must know everything about trading from A to Z. This profound and in-depth knowledge can help you gain the most returns from trading.
Here are some excellent examples of how academic research aids deep learning about trading:
- You’re able to understand all the technical terms related to trading.
- You know more about the different techniques in trading.
- You also understand when losing may be a good thing, or when it’s an inherent part of trading.
- Keeps you in the loop about the latest updates in trading.
Stocks are great investments. When you talk to financial advisors about what are suitable investments and what aren’t, the chances are that they are not going to advise you that investing in stocks might be the wrong choice, because it’s really not. Stock investment and trading only turn sour when you make a wrong decision regarding the shares to invest in. These may be the ones that don’t have good returns, or even worse, none at all. This highlights the need for traders to think hard before jumping into the arena. Carefully assess each type of stock that you’re looking to invest in, and make a well-informed choice. The best way for you to do this is through academic research. All the insights that you gain will lead to the right choices that will ensure your financial growth as you take part in stock trading.