FIVE TOP INSIDER TIPS FOR TRADING IN SHARES

1.A good company doesn’t mean it’s a good stock

Often companies that provide great products and services make poor investments. They are sometimes worth trading, but not always. There are couple of reasons that a great company doesn’t always make for a great stock.

In some cases, the reason customers like a company are because shareholders are subsidizing the costs. This is the case with Uber, which many customers love. The problem for shareholders is that the company is subsidizing costs to undercut competitors. Uber loses money on every trip, so the more trips it does, the more shareholders lose.

Another reason is that great companies, become popular with customers, and that attracts competition. If the company doesn’t have an effective moat, its margins will be eroded until there is nothing left for shareholders.

This doesn’t mean great companies are never great stocks. If a company has something unique that can’t be replicated—like Apple, Nike and Google do—then it can be a great investment. But don’t assume a good company will make a good investment.

2.Overvalued companies can go up a lot

The best stocks frequently become overvalued. But that doesn’t mean its time to sell them. Bubbles can last for years, both across entire markets and for individual stocks.

Fund managers are often wary of buying stocks that they think are overvalued. But eventually, they capitulate and buy them because their clients begin asking why they don’t hold the top-performing shares. Others sell stocks they believe to be overpriced, only to buy them back at even higher prices when they realize they got it wrong. This process can keep a stock price rising for years.

So, when you hear a stock is overvalued, it doesn’t mean you need to avoid it. It does, however, mean you need to be careful, because eventually it may decline a lot. Expensive shares just need to be managed carefully.

3.You need to embrace risk

Novice traders often make the mistake of doing too much to avoid risk. The truth of the matter is that you must accept the risk to be rewarded. Experienced traders love it when market volatility increases, because risk and opportunity both come with volatility.

The goal isn’t to avoid risk, but to find opportunities with a great reward to risk ratios. The more extreme a price move, the larger the potential reversal will be. A stock with momentum can generate much larger profits than a stock that is moving steadily. Both situations entail more risk, but they also carry the opportunity for disproportional profits.

When traders start out, they will often use very tight stops to reduce potential loss. The problem is that the tighter the stop, the more chance there is of it being hit. While they may be reducing the risk on an individual trade, they will end up with a string of small losses, with very few wins to offset those losses.

Risk does need to be managed, but it also needs to be embraced. This can be done with smaller positions and by diversifying across stocks and timeframes.

4.You don’t need to be in the market all the time

This applies to short-term traders rather than to investors. Expert traders wait for the best opportunities. Some days they might trade several stocks and execute hundreds of trades, and other days they might not do a single trade.

Experienced traders also very seldom use their maximum buying power. Most days they will be trading with 20 to 30% of the capital they have available. The rest is reserved for the days that offer exceptional opportunities.

Not only does this preserve capital for most profitable days, but it preserves psychological capital. The best trades come along a few times a year, and when they do you don’t want to be mentally exhausted from trading difficult markets.

5. Choose the right stocks

On any given day there may be just a handful of stocks worth trading. Pro traders create a new watchlist every day and focus on the stocks that most likely to offer good reward to risk trades.

So, how do you choose stocks to trade? Your watchlist should contain the stocks likely to move the most. Stocks with higher than average volume are more likely to move. Stocks with rising volatility are also worth watching.

Companies releasing earnings, particularly eagerly anticipated results also have potential to move. Whenever there is significant news about a company it is worth watching. Shares are usually tradable for three to five days after a news or earnings release. If a stock has broken out of a tight trading range or has broken a major technical level it may offer opportunity.

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