How to Master Stock Trading: Become a Pro with These Strategies

Stocks are doing extremely well this year. This year alone, stock investors have made more than $5 trillion. The S&P 500 which tracks the 500 biggest companies in the country has gained by more than 14% while the tech-focused NASDAQ has gained by more than 20%.

As a result, many people are now getting to stock investing which has been made easier by applications like Robinhood which do not charge a penny to buy and sell stocks.

The good thing about buying and selling stocks is how easy it is. You just deposit money, place your order, and if the trade goes on well, you make a profit.

But, investing in stocks is risky and requires skills. For example, in 2000, everybody starting from nannies to cab drivers were talking about stocks. This was during the dot-com bubble where dot-com companies were doubling in size overnight. Then, the bubble busted, and millions of ordinary Americans lost money.
So, how do you master the art of investing in stocks?

Read Books

Sadly, there is no shortcut to stocks investing. If you want to be good, you must be willing to take the long route which includes reading books.

This is especially the case if you don’t come from a financial or business-related background.

Books will open up your thinking about finance and how to find companies to invest in. They will give you real examples of how to find opportunities in the stock market and benefit from them.
While there are many books out there, I recommend you start with: Intelligent Investor by Benjamin Graham, One Up on Wall Street by Peter Lynch, Security Analysis by Benjamin Graham, and Stocks for the Long Run by Jeremy Siegal.

Apart from reading books, I recommend that you watch videos of investors talk about their lives and how they invest. I suggest that you watch this video by Bill Ackman explaining everything you need to know about finance and investing. I also recommend videos from the Milken Institute and Sohn Conference where investors share their investment ideas.

Come up with a Strategy

After reading books, you now need to come up with an investment strategy. This strategy will be determined by the type of investor that you are. For example, you can be a day trader where you buy stocks today, and exit the same day after you realize your profit. You can also be a long-term investor like Warren Buffet. This is where you buy a stock today and hold it for months and years.

You can also create a sectoral strategy where you decide to focus on stocks in one or multiple sectors. For example, you can focus on oil and gas companies if you are interested in the energy sector. Equally, you can focus on technology companies if you are passionate about the tech sector.

Find Stocks

There are thousands of companies that are public in the United States and depending on the broker you use; you can also invest in companies from other countries.

This is where most people, including me, go wrong.

Let me share my story. When I was starting out in investing, I did extensive research on a company which was trading at $7. I made up my mind to buy it, but before I did so, I talked to a friend who used to work at a competing firm. I asked him about how their business was doing, and he encouraged me to buy. Its stock was trading at about $3.

So, with my $1,000, I imagined that buying their company would make me more money. Then, I ignored my analysis and went with his idea. A few weeks later, the company released its earnings, and the stock price went down to $1.5. At the same time, the company I had analyzed soared to $10.

Many people lose money this way.

So, this is how I analyze companies to buy. First, I look at the industry the company is in and consider whether the industry is growing or slowing. For example, years from now, most people will be shopping online which means that retailers like Sears and Macy’s do not present an excellent growth opportunity. However, there are other retailers like Walmart that have incorporated e-commerce and succeeded. So, I can give Walmart a thought.

Second, I look at the top players in that industry and how they have performed. So, if I am interested in the oil and gas industry, I look at companies like Chevron, Exxon, BP, and Shell. I look at how their stocks have performed in the short term and the long term and write this information on a piece of paper. I also look at how their revenues and earnings have grown over time.

Third, I look at how the companies are valued. Experienced and sophisticated investors use complex financial analysis techniques like the Discounted Cash Flow method. For me, I don’t do this. Instead, I use price multiples like a price to earnings, price to sales, price to cash flow, and price to EBITDA. In simple words, these multiples compare how the company’s current share price compares to its sales, earnings, and cash flow.

A good platform to compare this is YCharts. It summarizes all this information for free.

As a rule, I always want to buy a company that is cheaply valued compared to its peers.

Fourth, after narrowing the set of companies, I look at the reasons why they have underperformed their peers. A good way to do this is to read their recent news, look at their revenues, and read their current earnings call.

Finally, I look at the company’s management team. In this, I look at the senior management and their track record, their compensation, and the internal dealings. In the latter part, I want to know whether the insiders are buying or selling shares in the company.

Quick Notes

In short, you want to invest in companies that:
Have products you understand like Coca-Cola and McDonalds.
Are cheaply valued compared to their peers.
Pay an attractive dividend.
Are in an industry with growth potential.
Have good managers who own a stake in the company.

Monitor Your Portfolio

Investing in stocks is always risky, and companies that you buy are not guaranteed to move up. In the past, we have seen prominent investors with hundreds of analysts lose money. For example, David Einhorn bought a stake in a company called SunEdison. A few months later, it went bankrupt. Last year, Bill Ackman bought a stake in Chipotle at $413. Today, the stock is at $279.

So, it is important that you monitor your portfolio and make adjustments when needed. However, to become successful, you must be patient. At times, your investment will go down for a long time before bouncing. For example, a few years ago, Bill Ackman sold short shares in a company called MBIA. By shorting, he believed that the stock would go down.

After initiating the short position, the stock soared for seven years when it fell from $70 to $2.

Equally, people who exited their long positions during the recession lost money, but those who held on to them have made a fortune.

Final Thoughts

I believe that anyone, including you, can become a stock market genius. You can master the art of identifying opportunities, taking them, and waiting for them to mature. You don’t need to have a degree in finance or work in Goldman Sachs.

By following the simple steps, I have just outlined, anyone can become a pro. The rules are: buy a company that is growing, that has good revenues and cash flows, that has products you understand, has good managers, and one that is cheap.

If you can’t do this, hope is not lost. You can make money by buying mutual funds, index funds, and ETFs that invest in a diversified group of companies.