Trading The ultimate guide to trading shares - part 3 December 3, 2007 Adam Hamilton CPA, Zeal Research
Are you interested in trading in the stock markets? Do you have questions about getting started? You are certainly not alone. Almost weekly I hear from ordinary folks with basic questions about trading stocks. After addressing these on a consulting basis for years, I’ll outline some of the basics in this series.
Stock trading is a lot like the classic game of chess. You can learn the basic moves in an hour, but it can take a lifetime to master all the strategies and nuances. So funding a trading account and learning how to buy and sell mechanically is the easy part. The hard part, which you will continue learning about as long as you trade, is picking the individual stocks to trade and deciding when to buy and sell them.
This is the entire mission of mutual funds, which are the vehicle in which most people choose to invest. The mutual-fund managers research stocks, pick their favorites, and try to buy and sell them at optimal times to make profitable trades. But the problem with mutual funds is the vast majority fail to even equal, let alone beat, general stock-market returns. You can do the same thing fund managers do, and often do it better, since no one cares more about growing your capital than you do.
The first thing to consider when picking stocks to trade is fundamentals. They are the underlying supply-and-demand dynamics affecting a particular company or sector, which is a group of companies in the same business. You want to pick stocks in a sector with strong fundamentals, where demand for their goods or services is growing faster than they are able to supply it.
Demand outstripping supply means higher prices, which translates into higher profits for producers and ultimately higher stock prices.
As a student of the markets and speculator, my favorite sectors since 2000 have been in the commodities arena. Commodities infrastructure was rusted and neglected after two decades of bear markets ending in the early 2000s, crimping supplies.
While worldwide supplies were low, Asia started demanding enormous amounts of raw materials to industrialize. Now global demand in many commodities is at record highs while miners struggle to keep pace.
But finding and bringing new mineral deposits to market takes years or even decades, so prices tend to stay high for many years before supply growth catches up with demand growth. In the meantime the profits for mining commodities soar, driving up producers’ stock prices.
Within a particular broad theme, like the industrialization of Asia’s affect on global commodities demand, there are individual sectors. One example is gold mining. Asians have a millennia-old traditional affinity for gold as an investment so as they get more prosperous they demand more gold. And within specific sectors like gold mining, you can research individual miners and explorers to find the best-of-breed companies.
And it is these companies, the elite within a strong sector benefitting fundamentally from a major long-term global trend, in which you should consider trading, since they will rise on balance.
CFD CENTRE
