US Stock Trading Workshop Malaysia: How to Choose A Good Company to Invest
Understand the difference between investing & trading in the stock market
To start with, it is important to understand the difference between investing & trading in the stock market.
In investing, an investor is looking for long-term price movement, which is an uptrend, to make a profit from buying low & selling high.
In trading, however, trader look for short-term price movement, whether it’s moving up or down, as they can make a profit in both directions.
An investor normally uses fundamental analysis to do his research, to find good companies that are worth investing.
A trader, on the other hand, spends more time in technical analysis, whereby they analyze chart pattern and using technical indicators to find trade set-ups.
In terms of transaction duration, an investor typical buy and hold the stock for a longer period of time, in most cases, more than a year.
For a trader, that is very much dependent on the strategy being used, these trades can last few minutes to few months.
It is important to 1st decide what kind of style & objective you would like to use before actually performing any transaction.
You can choose to invest or to trade.
Once that is done, you gotta perform a stock selection because the criteria are different between investing and trading.
For a trader, we have multiple different strategies that use borrowed capital type instruments and stock options. You can learn to trade gap, to trade debit spread and credit spread, or to learn our combo strategy that focuses on high potential set up and performance acceleration technique.
Choosing a good company to invest
In stock investing, there are 3 elements involved, that is a company that is doing day-to-day business, generating revenue and paying expenses.
When the company got itself listed in exchanges, its share or stocks are then made available for trade, to change hands.
Lastly, there are the people, the player that will buy & sell in the market.
In the long run, the movement of stock price is really tied back to the company performance & how the player sees it.
So, for investing to be successful, there are 2 important criteria that a company will have to meet.
1. The company must be financially healthy or improving.
2. The company must be producing growth, year on year.
Let’s see some simulation here.
Case 1, when a company is financially healthy and deliver growth, the company value will go up, and it goes up fast, which will eventually attract an investor to accumulate the stock. When demand is high, the price goes up.
Case 2, company that is financially healthy, but not having much or no growth at all. This is traditionally called cash-cow business. In this case, the company value still goes up, with profit turns into equity, demand will get slower compare to case 1, which result in stock price likely to stay flat, or maybe moving down.
Case 3, company that is financially not healthy, but deliver growth. In this case, with the growth, the chances of the company getting out of the financial trouble will be high. This will attract some group of investor that is looking for a higher return, and demand can be higher relatively. Stock price will stay flat or goes up.
And, lastly, a company that is financially not healthy, and not delivering growth. These type of company will slowly get into the bigger issue and lose its value. An investor may wanna get out from the stock, driving the demand lower. The result is, the stock price will go lower.
Let’s see some example.
Facebook, a company that is financially healthy, highly profitable, and deliver high growth forecast. You can see the stock price movement at the chart, it is only one way up.
2nd example, coca-cola a company that is financially healthy, continue to be profitable, but without much growth. The stock price stays within a range for a long time
3rd example shows Tesla, a company that is currently yet to produce any profit, but having high growth potential. With its development of model 3 & gigafactory, investor started to accumulate as it seems to be turning to make a profit soon. Stock price stays flat earlier and started to move higher.
And lastly, a company that is currently having trouble and no growth seen. Diamond Offshore, the company at this time is eroding investor’s equity, and yet to see any turnaround in growth. Analyst rating is to sell. The chart shows a clear price moving downwards.
So, from that important criteria, you now can choose good companies that are worth investing.
Get a FREE E-book from us as well, Our Handy Investing Guide: 4 Simple, Effective & Easy to apply strategies.
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