Remember how easily Leonardo Di Caprio could sell penny stocks in Wolf of Wall Street? Remember how easily he made money from the world of trading? It is this very depiction of the world of trading and stocks that misconstrue the world of trading as overly simplistic and make it seem easier than it really is.
In fact, every trader must take into account a number of different factors to make the right decision and not wash hard-earned money down the drain. In fact, the decisions are much easier to take today given the digital nature of most trading that makes decision-taking easier. Still, a trader must consider the following factors:
1. Formal or Informal
The most important yet undermined factors in trading are the considerations of whether the setting you trade in are formal or informal. Although they have little bearing on how you choose to allocate your funds, there is much to evaluate in terms of legalities and technicalities. However, it you think about it, a formal setting is better for the entire market since it takes away the power of a few people to dominate or exploit the market and maintains transparency throughout. On the other hand, an informal market will allow much more flexibility to you and have very few technicalities.
2. Investment Portfolios
Businesses that grow too large will often try and diversify their product line to ensure that they do not depend too strongly on one product. They try and diversify their product lines to make sure that a fall in the demand for one product affects their line too revenue too much. A similar technique often comes in handy for traders too.
Traders understand that each stock has a degree of volatility with the market, called its Beta. This beta dictates how risky a stock can be. In case a stock is very volatile to the market, it will have a high positive value while a stock with little volatility will have a low or even negative beta. A trader must ensure that he/she invests in a portfolio of stocks whose individual stocks’ betas add up to cancel out each other. As a result, no matter what kind of behavior the market exhibits, your portfolio will always return a profit for you.
3. Understanding Risks and Returns
A very important concept in trading is understanding risks and returns. Every actor in the trading realm understands that the greater the risk of a stock, the greater its return must be. In keeping with this concept, every trader must always factor in the riskiness of a stock while calculating its inherent value before making an investment in the said stocks and securities. If precaution is not taken in making sure that the correct value of a stock is calculated, it will not be wrong before the stocks begin to yield negative return and in such a case, no online trading portals or easy hacks could save you from going bankrupt.
