Before you start to buy and sell stocks, it is important to look at who you are and what you want to achieve.
To begin with, we need to understand some basic terms.
The term investor has many different meanings; the Collins English dictionary defines it as “An investor is a person or organization that buys stocks or shares, or pays money into a bank in order to receive a profit.” But this is a little generic to be used clearly for us to reference.
In the world of finance, investment, and speculation, the way in which you seek to gain your profit dictates what you are. For Example:
The 5 Types of Investor
A speculator seeks to exploit short-term trends, loopholes, momentum, or news to seek to gain on money invested.
For example, if I see that there is an incredible positive Volume on a stock and I want to trade into that stock to get a quick gain without having any in-depth understanding of the company, industry or management team, I am essentially speculating that this event will make the stock rise.
Alternatively, someone who enters into an Options Contract shorting a stock, in order to make a profit is also speculating that the stock price will drop during a given timeframe. This certainly is not investing. None of the Cash invested in the Options Contract will ever be seen by the company in question; therefore, you are not investing in that company.
George Soros could be considered one of the ultimate Speculators, and indeed the most successful (net worth circa $7 Billion).
Soros was known as the “man who broke the Bank of England,” took out a $10 Billion Short Position, betting that Pound Sterling would fall. Although the Bank of England did everything it could to prop up the Currency, it failed, and Soros bagged $2 Billion profit from the bet. Soros was betting on a future event happening. Was this risky? George Soros does not take an undue risk; his knowledge of the Global Finance and Capital markets enabled him to take a calculated risk, which paid off handsomely.
What he did is classic speculation. Those who speculate in stocks usually use Charts and News events to trade upon.
The investor is usually someone whose money is used to capitalize on a company, and the money is invested accordingly by the company to achieve better business results. An investor will seek a reward for his belief in an investment, and seek a profit thereof.
An investor will have evaluated the worth of an investment, and seek a steady return from it. Someone who buys their own house is an investor. An investor will often seek to minimize risk and maximize reward.
A smart investor will look to buy an investment at a time where it will be a great value, and this value will help to minimize downside risks. An investor looks at the business fundamentals of a deal and weighs facts, not emotion, to enable a thorough judgment to be made. This is known as value investing.
Buying Bonds, with fixed rates of returns, are an investment for someone looking to beat their Banks Saving/Checking account interest, but also unwilling to take the perceived risks of purchasing stocks.
A trader is someone who buys and sells a product to make a profit. However, someone who is an investor could trade stocks, and also people who speculate usually trade contracts, stock, or use other more exotic tools. A day trader is someone who actively trades on an extremely short-term basis to make quick, normally small gains. This type of trading in not recommended by this site.
The Liberated Stock Trader
The Liberated Stock Trader will seek to base stock purchases on solid facts that make business sense in the cold light of day. A combination of selecting fundamentally winning companies, with great futures, and using actual facts (Charts & Valuations) to decide if the time is right to buy this stock. Being a Liberated Stock Trader, you will invest in solid companies and speculate on the exact timing to buy this great company.
A Liberated Stock Trader, should understand but not be ruled by:
- Current Events: current events may be important if they lead to big events (for example the collapse of Freddie Mac and Fannie Mae), but applying the Pareto rule of 80/20, would suggest that 80% of current events are none relevant to you making money on a stock, and 20% of current events cause 80% of the bigger movements in stocks.
News: news is important, but it does not mean you will make a profit or not unless it is extremely macroeconomic “the government of Iceland just went bankrupt,” or microeconomic “General Motors has gone Chapter 11,” and you own the stock.
- Rumors: The Wall Street rumor mill, which is based primarily on emotion and short-term news, may get you too emotional, and lead to erratic investment decisions.
The latest hot tips: usually provided by people with hidden interests or less knowledge about investment than yourself.
- Hot stocks newsletters: playing on your ignorance and lack of understanding of what constitutes a good investment, and making you pay for the privilege.
- “Pay for” stock trading systems: systems that will trade for you, this is priceless, what a joke. The day I trust my money to a mathematician and a computer programmer will be the day I leave for Romania to be a Shepherd.
The Liberated Stock Trader is someone who invests in Businesses (Investor), down selecting those winning companies based on solid fundamental reasoning and fact. They will also use Technical Analysis (Stock Charts) to decide which of these companies would perform the best in the next Days / Weeks / Months / Years.
Which one are you?
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