After deciding to invest in shares or forex, new traders have to start analyzing the stocks and currency pairs that can be bought and sold. That is not a simple task due to the scope and scale of different companies, industries, and markets and the myriad of factors that can turn a potential safe trade into a riskier prospect.
If you want to know how to get started trading, there are a range of free courses that will help you to conduct fundamental analysis to choose the best broker. The following tips and tactics will also enable you to find stocks and currencies that are right for your portfolio as you start your investment journey.
Consider the industry
New traders are often guilty of having a myopic view of a company’s stock. They only consider the qualities of that specific business and not how it relates to the broader industry or the qualities and factors that make that particular industry unique. When trading stocks, particular industries are not always conducive to significant share gains. For example, companies in the steel industry have to compete against a vast network of global competitors with considerable financial backing. Companies in a “weaker” industry can underperform the market even if they deliver ample returns.
Every industry is different, but knowing its essential characteristics and how quickly supply and demand can change will inform your decision making when looking for stocks in which to invest. As an extension of this, more prominent companies with brand power are often viewed as a preferable outlet for investors that want to target long-term dividends. Coca-Cola, for example, has greater autonomy over its pricing due to its position as a market leader and can weather industry downturns due to the strength of its product.
Select major pairs when trading forex
When trading currency, major pairs such as GBP/USD and EUR/USD are a “safer” bet as they are the most frequently traded currencies around the world. They generally offer a tighter spread and lower brokerage costs. In contrast, exotic currency pairs such as USD/HKD and NZD/SGD are not as common and thus offer higher spreads. These exotic spreads are not as easy to find and trade and should probably not form part of a beginner trader’s strategy.
Look at a company’s operating leverage
Experienced stock traders keep tabs on the operating leverage of a company as part of general cost-accounting formulas for investment decisions. Operating leverage is crucial because it has a direct impact on the finances of a business. It is linked to how a change in sales affects a company’s earnings and how much debt it can use to support daily operations.
Traders looking for safer bets generally steer clear of companies that have higher operating leverage if there has been a recent dip in demand. That is because they need to cover more fixed costs outside of sales performance, and this is likely to lead to a notable drop in earnings.
Look at the size of the company
Start-ups and micro-enterprises have an inherently different risk-return profile compared to larger companies. During the formative years of business, revenue streams are not as diversified, and there is a higher chance of failure. On the flip side, smaller companies can offer excellent growth potential, especially in the tech sector.
Large conglomerates are more stable in their operations and have different revenue levers that reduce the volatility of potential earnings and revenue. Apple, for example, has recently been able to use its Services division as a growth driver to offset a plateau in demand for iPhones.
Safer investments can encompass both small and large companies, but when targeting the former, see whether it has more than one product or service line and ask yourself whether its smaller economies of scale could potentially be a disadvantage.
How to identify companies
To identify companies to invest in, you can start by seeking out expert opinions via news sources, and by analyzing financial news releases and any other information related to the company and the industry. The views and ratings of analysts are valuable but consider different opinions to get a well-rounded take on a company. Use a stock screener to filter stocks for your specific needs. You can use a screener to sort companies by market valuation and other key metrics.
The research for trading forex follows a similar pattern. However, you will also need to read up on the characteristics of currency pairs and get to grips with the fundamentals of chart reading and making sense of technical indicators to find safer bets. Armed with all of this knowledge, you will be able to make the right choices when investing.