Can You Make Money By Day Trading In The Stock Market?
Before we dive deep into the complexity of whether investors can make money in the stock market, let’s get straight into the most basic question: What are stocks? Those who are new to the investing world might want to understand the basics first. A stock (also known as equity) is a security that represents the ownership of a fraction of a company. Of course, if you happen to own a couple of Apple (AAPL Stock Report) shares, it doesn’t mean that you can just enter an Apple store and ask for a free iPhone. After all, owning a few shares in a company doesn’t mean you can control it.
For companies, issuing stocks is a way to raise money to fund their expansion and invest in their business. For investors, stocks are a way to grow their assets and outpace (hopefully) other forms of investments over time if done correctly. Public companies sell their stock through stock market exchange, like Nasdaq or New York Stock Exchange. The traditional pathway of becoming a public company is through the initial public offering (IPO) process.
The stock market’s return on average is about 10% annually. That’s the average return over the past 100 years or so. This is a better deal than interests from the bank or US treasury bonds. So here comes the real question. If it can provide such a decent return annually, why do so many people fail to earn that 10%? The truth is, many don’t stay invested long enough. For example, say you began investing earlier this February 2020. And you invested in Amazon (AMZN Stock Report) when it was trading at $2,155 per share. When the pandemic came, it dropped 20%. For beginners, there could be some panic selling. However, investors who see the long term potential would stay invested and even buy more on the dip. From the stock market crash in March, AMZN stock has almost doubled in value.
That is to say, the key to gaining profits in the stock market depends largely on the investor’s length of time in the market. Unfortunately, many investors often buy and sell stocks according to their mood and sentiments. And that means there is a good chance they will miss out on obtaining good returns over time.
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How To Make Money In The Stock Market?
Can you make money in the stock market? That is another question that’s frequently asked by beginners or novice traders. For sure, the stock market is a great place for you to make money, but that too largely depends on your own strategy. We know stocks fluctuate throughout the day. These movements depend on the supply and demand of a particular security, meaning how many units of a particular stock people are selling or buying. There is a mix of metrics that investors consider. Some look at momentum while some pay more attention to the fundamentals of a company.
The stock market is an interesting place where each participant will have different sets of strategies when it comes to stock trading. Scalpers and traders typically look for quick flips. They would pay attention to stocks that are moving fast in the market, aiming to profit in mere minutes or perhaps a few days. On the flip side, investors who are in it for the long run, typically look at the fundamentals. By fundamentals, it can be the earnings growth of the company, the scalability of the company’s business, and how your money invested can grow over time with the company.
Which Is The Best Strategy For Investing In The Stock Market?
When it comes to investing, there is active trading where investors buy and sell securities based on short-term movements to profit from the volatile movements on a short-term stock chart. On the other hand, you have investors in it for the long-term, and this buy-and-hold strategy is often found among passive investors. More often than not, these investors first identify stocks of companies that have strong business prospects. They then buy and hold the stocks, hoping that the stock prices will appreciate massively over the long run. Passive investing is an investment strategy to maximize returns by minimizing buying and selling. What you need to do as a passive investor is relatively straightforward, you pick an industry where you think has the potential to become huge over the next decade. For instance, it could be cloud computing technology or the electric vehicle industry.
There’s no perfect strategy, really. It all boils down to who you are and what you are looking for in the market. With the right timing, you could amass great profits from a quick flip. That being said, if you can make money that fast, you stand an equal chance of making a quick loss, too. That is why managing risks when making investments is so important. Stock trading, in general, comes with risks. But thoughtful stock selection that meets your goals and risk appetite could keep risks at an acceptable level. If you can stomach the risks of active trading, there are several general strategies that can be employed.
Active Trading Strategy #1 Day Trading
Day trading is surging in popularity as more and more people are looking for financial freedom and the ability to live life on their own terms. As its name implies, it is the method of buying and selling stocks within the same day. Positions are closed out within the same day they are bought, and no position is held overnight. With the ongoing coronavirus pandemic, there has been an increase in stock market participants. It’s not just the millennials taking advantage of this opportunity. The flexibility of working from home also gave rise to employees trading more often.
Active Trading Strategy #2 Swing Trading
Unlike day trading, swing traders take trades that last multiple days, weeks, or even months. When there’s a lot of price volatility, swing traders typically get in the game. Swing traders primarily use technical analysis to look for trading opportunities. In some cases, they may also utilize fundamental analysis in addition to analyzing price trends and patterns.
Swing traders aim to capture significant price movements in their target stocks. Some may prefer volatile stocks that move a lot, but others may prefer those with more stability. In any case, swing traders are looking to predict where a stock’s price is likely to move in the near term. They enter into a position with the aim of profiting from the expected movement. Whether or not the movement materializes, swing traders would likely move on once the window of opportunity is over.
Active Trading Strategy #3 Scalping
At its core, scalping is an ultra-short-term trading strategy in which traders elect to take small profits quickly as soon as these opportunities become available in the stock market. The strategy is also often referred to as “picking up pennies in front of a steam roller”, scalping focuses on identifying volatility in price during extreme short-term. This includes exploiting various price gaps caused by the bid-ask spreads and order flows.
In addition, a scalper does not try to exploit large moves or high volumes. Rather, they try to repeat small positions repetitively. Since the level of profits per trade is small, they tend to look for more liquid markets to increase the frequency of their trades. That is to say, many small profits can easily compound into large gains if a strict exit strategy is used to prevent large losses. Typically, the short trade durations insulate the trader from greater systemic risks present in the marketplace and limit the potential liability of each trade. But that doesn’t mean it’s a sure win trade. Common mistakes to bear in mind include overtrading, not utilizing stop-losses, and over-leveraging.
The Bottom Line When It Comes To Active Trading In The Stock Market
Again, one trading style isn’t better than another. It really boils down to which style suits an individual trader’s circumstances the most. Some traders prefer to do one or the other, while others may be day traders, swing traders, scalpers, and passive investors all at once. With some persistence and patience, the stock market can really become a great avenue to make money. Otherwise, why does the news talk about the stock market so much? Some stocks have a higher risk profile than others. However, if you can successfully navigate that risk and put together a strategy that suits you, then there’s no reason why stock trading is not for you.