The Secret to Learning How Stocks Behave
Depending on what type of investor or trader you are, choosing a sector or a strategy to focus on can be a great start.
Passive investors who play the long game usually choose a specific sector to invest in through mutual funds, ETFs or specific stocks they know well in the sector.
On the other hand, active traders don’t necessary focus on a sector, but rather on a corner of the market with plenty of opportunities to trade — potentially with the odds in your favor.
Whatever the case, let’s review a couple of sectors of the market that frequently have something to offer …
Technology Sector Performance
Technology dominates a big part of our lives, so companies in this sector have led the growth over the past decade. Many of the most recent success stories are technology companies. Can you think of any?
Also, because the market is always trying to find the next “big thing,” companies in this sector are on the spot for many investors, bringing volatility and offering trading opportunities for long-term investors and traders alike.
S&P 500 Sector Performance
Though the S&P 500 isn’t really a sector, the index tracks the biggest 500 companies in the U.S. market, so it’s also deserves a bit of our attention.
As the index represents around 80 percent of total market capitalization, its performance influences the rest of smaller stocks in the market and investors’ market sentiment. It marks a trend you want to be aware of.
A well-known, long-term passive investment strategy is “buying the index” through a fund or ETF that tracks the market. As I said, the S&P 500 has returned 9.5 percent per year over the last 10 years.
Though I focus on trading smaller stocks, penny stocks specifically, I still recommend you get to know and follow the S&P 500 index. It can help you to understand the overall market sentiment at any given time.
Best Sectors to Invest in Long Term
When people ask me about the best long-term sectors and companies, I always answer the same: There’s not an exact way to predict the long-term future and know exactly the best option.
But there’s one thing I know for sure: To become a sector-type investor with potential, you’ll need to develop a deep, expert knowledge of the economy, fundamental analysis, and the sector’s business cycle.
That’s a specialized, complex skill to master … but I like to keep things much more simple.
Key Tips on Choosing Sectors to Invest In
The key to choosing a good sector or a good stock is doing lot of research and studying the market as much as you can until your eyes get blurry. There are no shortcuts.
But because I know that many people are going to ask me again anyway, I have a few tips so you can start doing your homework in the right place. But remember, there isn’t a magic formula for this.
1. Technical and Fundamental Analysis of the Stock Market
As I mentioned earlier, there are two main analysis approaches you’ve gotta understand and get the pulse of the stock market.
Technical analysis is based on the study of stocks’ chart prices and patterns. Knowing how to read stock charts is critical because charts capture the full history of a stock’s past performance.
Then we have fundamental analysis. You don’t need to be an expert on this, but it doesn’t hurt to know how to read financial information, earnings, and estimates.
Knowing these two approaches is undoubtedly helpful. It can help filter out the noise and get to the real gems. That’s what finding opportunities is all about.
Liquidity, Volume and Price
Liquidity, volume, and price are three critical variables related to technical analysis that every trader or investor must know. If you’re an active trader, this is even more important.
These three qualities can tell you a lot about a stock and act as a filter criteria to help spot opportunities.
Liquidity is the number of shares of a particular stock that are traded on a regular basis. High liquidity allows you to enter and exit a position in the market relatively easily. There’s no point in trading a stock with no liquidity. It’s too risky.
Regarding volume, an increase in volume means something’s going on. There’s probably breaking news, an event, or something that results in the stock’s price movement.
Lastly, stock price is another key variable you need to understand well. There are several reasons. In my case, I trade mostly penny stocks, which cost less than $5 per share.
A low price is important because that means you don’t need a huge investment account to potentially capture significant profits.
2. Be Careful While Choosing What To invest In
I’ll never stop saying this: Don’t waste your time in this game unless you have dedication, focus, and you’re cool with research — those are the traits I want in my students.
Besides learning technical and fundamental analysis, you also need to be aware of the risk and have a way to manage it.
Risk Control and Mind Stops
When you enter a position, you’ll never be 100% right every time. Sometimes, you’ll be wrong no matter how rational your analysis was.
When this happens, you need to be prepared in advance to manage this situation. The best way is to have a plan to exit the position with a small loss.
If a position goes in the wrong direction, you need to be willing to exit the position and take a modest loss before it get bigger.
Don’t crush your account … don’t crush your confidence … just get the hell out.
3. Master your Skills with a Mentor
You did it! You learned sector basics. See, that wasn’t so bad.
When I learned this stuff, I took the long way. I had to learn everything on my own with hard work until proving myself successful. I didn’t have a mentor or someone on my side willing to guide me.
And that’s risky. I made it, but for many aspiring traders and investors without much of a background in this stuff, their losing streaks are longer than the size of their bank account, and that’s the end of it.
Long story short: Get a mentor.
The Bottom Line
Knowing about investment sectors can give you a good foundation to understand how the market works, how groups of similar stocks behave and react, and how investors perceive them.
Now that you know it, use it as a starting point to help you monitor, spot, and take advantage of the opportunities the market offers you.
Editor, Penny Stock Millionaires