Understanding The Strategies Involved In Trading The Stocks
A stock market is exciting for potential investors because no hard and fast rule can guarantee a profitable investment. Sometimes there may not be a concrete reason, sometimes, there are pointless speculations, and sometimes, internal emotions come into play while trading the stocks. Thus, no defined set of instincts will lead to victory. Different investors start investment with different strategies in distant horizons.
The stock exchange or the stock market trade is the process for buying and selling stocks, and the growth of the economy of any nation is directly proportional to the stock prices of that particular nation. The performance of a business is another determining factor for stock prices. If a business is doing well, its stock prices will likely increase and vice versa. However, there are odd scenarios where a crappy company’s stock might end up with a steep increase in price. Business organizations invite investors to buy supplies from them so that they can finance projects that require huge capital or expand their operations.
Stock is the standard term for all shares that investors buy from companies. This gives them a part of ownership through which they can exercise their rights to claim the company’s earnings and assets. Another relevant term with stock trading is the stock market index.
The stock market index is the parameter used in the stock exchange to determine the rise and fall of stock prices. Usually, similar companies’ stocks are grouped based on their capitalization, industry, size, etc. Any fluctuation in the value of the stocks of a particular index will affect the value of the index. Sorting similar shares provides a point of reference. Otherwise, it would have been chaotic to manage so many stocks altogether.
What are the theories behind the trading strategies of the stock market?
The belief that trading can be profitable is the basis of any trading strategy. However, there are two famous market theories behind the concept of trading.
- Random walk theory:
Proposed by economic professor Burton Malkiel, this theory suggests that securities prices fluctuate randomly without any pattern or format. So, predicting the future price movement of stocks through fundamental analysis is futile and unnecessary. This implies to the traders that attempting to outperform the market is useless because it occurs only due to the sheer chance of events even if you are investing in share market online.
This theory mainly emphasizes the “buy and hold” strategy selecting from the stocks representing the overall market. This is a slightly controversial claim later opposed by many investors and market experts, stating that stock prices follow a definite pattern and trends in the long run and that is the core concept behind any share trading app.
- Non-random walk theory:
As the name suggests, this theory focuses on the opposite of the above mentioned concept. The traders and investors following this strategy believe that the previous patterns, historical price movements and trends play a crucial role in predicting future price movements. This theory has proved substantial in various instances where we see some traders consistently outperform the average market based on their prediction and fundamental analysis through stock broking app.
It comes down to the choice of individuals to decide on their trading strategies. Investing in a good ETF or mutual fund can be wise if you believe strongly in the former random walk theory. However, if you strongly feel that movements are not random, then focusing on learning the technical analysis for stock trading should be your next move.