Many articles have been written on our pages about investing and how to play on the stock market. In addition to discussing the principles of technical and fundamental analysis in detail, we presented side articles that also help in investing: such as choosing the right Brokerage House or what ways you can buy shares of listed companies. However, we avoided writing an article under the above title, because we believe that there is no universal method of investing. However, we have written down subjective points that are used in almost every investment strategy, or – in our opinion – should be used. Each investor will have a different approach to the subject of how to play on the stock market at some point. However, we have tried to present the most universal steps of action.
A concrete action plan before the investment
This is the most important rule before any investment, especially in company shares, because here there can be diametrical exchange rate fluctuations. Intraday fluctuations of 10% are not uncommon even in companies from the WIG20 index, not to mention companies from NewConnect.
I started writing about exchange rate fluctuations, because the greater the changes in the exchange rate, the more unstable our mental comfort becomes. Colloquially, we say that then the stock exchange tarnishes our emotions – and as we know, emotions are our worst advisor. In such a state, we usually do not think rationally. Hence, it is very important to have a rigid plan before entering into a position on the shares of a given company. This plan should assume the level of exit from the position in the event of a negative development of the situation or set a specific event, the occurrence of which will result in the sale of shares. The same applies to positive developments in the stock price. And here I am not talking about a rigid Take Profit – because I do not use such a profit myself – but you should immediately assume what method you will choose to sell shares. I usually use a trailing Stop Loss. The breadth of the defensive level depends on the development of the situation on the chart and, as a rule, on fundamental aspects.
I myself usually do not use rigid Take Profit. I believe that every day changes the picture of the chart. That is why we analyse the candles occurring on the companies every day. However, for such a “live” analysis, you need experience and familiarity with the stock market – so that emotions do not drown out rational thinking. For most beginner investors, however, the method of rigid Stop Loss and Take Profit will be more effective.
Let’s start learning with smaller amounts
In addition to investing virtual money, it is worth investing smaller amounts on the stock market at the beginning. And this is even in the amount of PLN 100-200 per item. Theoretically, we lose on commission with such transactions, because usually the minimum commission is PLN 3, but it is a loss of PLN 2-2.50. In order not to lose on commission, we should enter the position with an amount of min. 1000 PLN. However, I do not think that the amount of PLN 2 is high for learning emotions on the stock market. For some, PLN 1000 per transaction will be a small amount – then we will not lose “commission” due to too small a position.
During this time, we should invest virtual money and read a lot about the stock market. Without familiarity with the subject of the stock market, we automatically write ourselves up for losses – as in any field in which we have no idea.
Portfolio diversification
I am a big opponent of investing most of our money in one asset/company. Only insiders can afford such a move, who can check all the information and are kept informed about the company’s movements. However, even if you are an insider, not everything can be predicted. And here we come to the point: even the best company experiences unexpected situations that could not have been predicted.
So if you ask us how to play on the stock market, we will also answer: diversify your portfolio! The more companies in the portfolio, the less likely it is that our company is being manipulated in the broadest sense. The limit is, of course, the transparency of the portfolio, because each company would have to be analyzed every day. On average, I have 6-8 companies in my portfolio.
Losses and gains live in symbiosis
And here we come to the biggest thinking mistake of beginner investors (and sometimes even “advanced” ones) in investing in the stock market. This mistake is the assumption that a losing trade is a mistake – a mistake in the investment strategy. And here we answer: this is not the case. Any investment strategy should include losing positions. Every investor also executes losing positions. The most important thing is that the balance of our transactions is positive. And preferably from a period of ~5 years, because only then can we determine whether our strategy is effective.
5 years, because the strategy is effective when during a bear and bull market we obtain a positive rate of return in total. It can be preliminarily assumed that a bull market lasts on average 2-4 years, and a bear market 1-2 years. And it is this long period of “testing” that makes novice investors have a hard thing to crack. But no one said that investing in the stock market is easy. It is certainly a long-term process.
There is no universal investment strategy
Here I will write an obvious thing, but in the course of emotions and the topics of money, not everyone remembers this: each of us is different. Each of us reacts differently to given stimuli. Each of us has a different “emotional” state. We have better and worse sides, more and less developed skills. Weapons should be individually tailored to each of us. The answer to the title question – how to play on the stock market – depends on our personality. If we know that we are “emotional”, we change our mind every few seconds, even though the data we used in the analysis has not changed during this time, then we use rigid stop losses. Only then can we start “reading” the market and adjusting the strategy minimally to the changing factors, how we will keep a cool head when investing. On the stock market, rational thinking and cool analysis of charts and published information are the basis for effective investing in the stock market.
Therefore, I will not write that technical analysis or fundamental analysis is a good investment method. There are many other methods, such as playing for reports, for given events, for seasonality, etc. Each method has some similarities. Each method can be combined. Personally, I use technical and fundamental analysis and other methods depending on the company. However, technical analysis (mainly volume analysis) always plays the first fiddle for me. You may ask why? The answer is simple: because it works for me – not that it is better than another method of analysis. However, it happens that fundamental analysis comes out on top – for example, in the case of dividend companies.
I approach each company/industry individually. The best example is the game development industry, where I invest typically for game releases. I leave the position immediately before the day of the Premiere.
Ability to analyze reports and information from ESPI/EBI
You have to realize one thing: most CEOs are very good marketers/”PR people”. If a CEO speaks positively about his company, don’t take it as positive news – unless he provides specific data. The president cannot manipulate official information, but embellish the situation. And this is what happens in most cases. Have you ever come across an ESPI report where the CEO speaks negatively about his company? Such information can be counted on the fingers of one hand. The closest example is the statements of the President of Budimex from this year, who mentioned the imminent/current problems in the construction industry. There are a lot of positive statements, however.
This happens not only because CEOs should present the company in a positive light, but also because of the psychological aspect, which is overestimating their own skills. In psychology, this aspect is called “Overconfidence Bias“. Therefore, most of the preliminary financial estimates of the management boards are inaccurate.