Trading Equities – A Huge Market
In the financial markets, the foreign exchange market is the largest with more than $5 trillion being exchanged on a daily basis. The equities market is equally huge with many institutional investors and hedge funds moving money on a daily basis. In the United States, there are more than 5000 listed companies which trade on a daily basis. As a trader, these companies present you an ideal opportunity to make money.
However, to make money in equities you need to be extra careful. Just as in the forex and commodity markets, many people have lost their money in the equities market. This happens when these people make the wrong decisions and stick with them.
As noted above, since there are thousands of listed companies, the companies have been put into various categories. This is based on the work that they do. For instance, Chevron and Exxon are listed in the same categories while Facebook and Twitter are listed in the same category. To have a diversified portfolio for your day trading account, you can opt to trade in different categories. For instance, you can decide to trade in energy and media. Alternatively, you can decide to trade the customer discretionary and utilities. How then do you select the best industries to venture in?
As I have written before, your role as a trader is not to chose the company that is overvalued or undervalued. You won’t make money by doing all the statistical analysis or coming up with models that are paraded around by hedge fund managers and sell-side analysts. This is simply because you don’t intend to own these companies forever. In fact, you want to enter a short position today and exit in the evening. The following day you might decide to go long the same company.
Trading Equities – Developing a Strategy
What you really need to know when trading multiple industries is the price movements. If you have a good understanding about how the price moves among various companies or industries you will be good to go. For instance, there is a good correlation between energy companies and those in the transport industries. For instance, if the price of oil goes up, then it will mean that airlines will pay a higher price for jet fuel. Therefore, with increased oil prices, chances are transport industries will be affected. Another example is on oil and banking stocks. When oil prices fall, it leads to oil companies being in a reduced liquidity position. Some of these companies might even end up defaulting on their credit obligations. Therefore, chances are that a decline in oil prices will lead to a decline in oil stocks which will have an impact on financial stocks. As a result, having this understanding will help you in developing a good hedging strategy.
Market or industry volatility is another thing you need to consider when trading various categories of equities. Some companies are usually in more demand than others. A good example is internet companies which many investors want to own today. For instance, companies such as Facebook are usually in demand than utility companies. As a day trader, you actually want to trade companies that are more volatile as this will give you a chance to make more money.
Last but not least, mergers and acquisitions are very important to consider when trading equities. You should be in the look out on the companies that are about to merge. In this situation, arbitrage