Strategies for finding and picking good stocks to buy can be conditionally divided into speculation and investment strategies. If you decide to start trading in the stock market, you should choose the right strategy for yourself. In this article, we will explore the difference between investors and speculators and discuss some key points. Read on to find out how to pick good stocks regardless of which path you choose.
- Investor strategy
- Speculator strategy
- The difference between speculators and investors
- Which strategy is best?
- Speculators and investors on Olymp Trade: How to pick stocks
- Making the right decision
Interact with the underlined words and green dots to get additional details and explanations.
Explanations and definitions of terms.
The essence of the investment strategy is to profitably invest capital by acquiring shares for an average period of three to five years. The main task of the investor is to study and analyze the factors affecting a stock’s price and determine the best time to buy and sell.
The investor’s income is formed through the following trading approaches:
- Searching for and purchasing growth stocks.
- Buying value stock owned by stable companies that regularly pay out profits in the form of dividends.
- Combined buying of growth stocks and value stocks for portfolio diversification.
How does an investor choose a stock?
1️⃣ If you have chosen the path of the investor, then your main goal is to identify undervalued stocks whose current price is lower than it could be in the future. Alternatively, you could find stocks that you think will generate income in the form of dividends.
2️⃣ Investors are guided by a fundamental analysis of the companies whose shares they buy. They study a stock’s financial performance, the external and internal environment of the company and, based on this data, evaluate future prospects for the stock’s growth.
3️⃣ It is important to consider the size of your investment and how much you are expecting the stock to rise, that is, the expected stock price and investment period.
4️⃣ When satisfied, investors make a purchase and wait for the moment when the company’s full potential is reflected in its stock quotes. The stability and steady yearly increases in price make the assets of Apple, Coca-Cola, Johnson & Johnson, Alphabet (Google) most preferable for investors.
In Stocks mode on Olymp Trade, you can buy small fractions of shares called fractional units. You can buy expensive stocks, even the ones that would normally be outside of your budget, and adjust the number of units depending on how much you are willing to invest.
The speculation strategy is short-term purchases of shares in order to profit from a rise or fall in the price. Speculators trade stocks knowing they will not hold them in their financial portfolio for long. In simple words, speculative investments are short-term investments in order to get maximum profit in a short period of time. For speculators, the stock market must have price jumps or volatility, on which they can make money.
Below are three types of speculation:
Buying and selling stocks within seconds to minutes. During the day, a speculator can make dozens, and sometimes hundreds, of such transactions. This is a complex way of trading that requires concentration and skill.
Intraday trading 🕐
A type of trading in which traders buy and sell an asset within the same day.
Swing trading 🗓️
A type of trading in which traders buy and hold a stock (or other assets) for up to one month.
How does a speculator choose a stock?
1️⃣ If your strategy implies a trade in stocks for the short term, then you need to determine an acceptable level of income and loss for yourself.
2️⃣ For a speculative style of trading, it is necessary to identify volatile stocks based on their short-term and medium-term trend forecasts. The main instrument in a speculator’s toolbox is technical analysis. With its help, you can make forecasts at different time intervals, from a few minutes up to several days or weeks.
Using technical analysis, a speculator examines the mood of the market (supply and demand) and determines which stocks to buy. His tools are: levels, candlestick patterns, chart patterns, indicators and trends.
3️⃣ In order to track trends, speculators need to follow the news in order to understand the backdrop that inevitably influences the market. For example, Elon Musk’s statement about Tesla’s success can quickly change the direction of this company’s stock price.
4️⃣ Knowing the market situation, using technical analysis and following the news, speculators reveal future trends and trade on volatile stocks that experience more dramatic daily price movements, such as AMD, Nvidia, Netflix and others.
Learn more about technical analysis and its features, starting with the beginner’s guide on Olymp Trade Blog.
The difference between speculators and investors
The main difference between a speculator and an investor lies in different strategies for picking stocks to buy and approaches to working with the stock market.
Traders own shares for a short time, whether it be seconds, minutes or several months. Investors buy shares to hold onto for years and even decades.
Due to transaction frequency, a speculator’s income can reach up to 20% or more during a trading session. For an investor, this can only be an annual level of income.
Due to a long time horizon, investors can easily wait out any drops in stock price. Speculators experiencing a sharp change in a stock’s price are forced to close positions at a loss.
While trading, speculators use various tools such as stop loss and take profit, while investors don’t need to use them. In addition, speculators often use leverage, which increases both profits and risks.
A different view of the market
Looking at the graphite of the share price, investors see their ultimate goal as well as the profit they will receive from capitalization growth and share price, or the payment of dividends. On the same chart, speculators see periods where, in their opinion, positions can be bought and closed.
Time is money
Unlike investors, speculators conduct many transactions, so they are forced to devote a lot of time to technical analysis and transactions. Additionally, speculators pay a commission to their broker for each transaction, but this is usually made up for in profit.
Which strategy is best?
Despite the obvious difference between investors and speculators, they are both market participants, and both take on some risk. Before making a choice about whether to go for investment or speculation, you need to identify your financial goals, trading strategy and the time you are willing to devote to learning and trading.
The best way to get the most out of stock trading is to combine both investment and speculative activities. This way, you will be able to understand what is right for you. By choosing the right balance between speculation and investing in stocks, you will be able to manage risk.
By combining these strategies, you can reap more tangible results from your financial activities. Through investing, you will learn to determine the real value of companies and the growth prospects of their shares. With the help of speculation, you gain the skill of determining the optimal time to buy and sell those shares.
Speculators and investors on Olymp Trade: How to pick stocks
Olymp Trade satisfies the needs of both investors and speculators in three trading modes: Fixed Time Trades Forex and Stocks. If your goal is speculative trading, then our Forex and Fixed Time Trades modes are for you.
In FFT mode, you can trade on assets’ high and low price points, and make trades that range in duration from one minute to to 23 hours.
Forex mode allows you to choose the direction of the stock price — whether upward or downward — but you can close a trade at any time. The term of transactions in Forex mode is unlimited. In addition, you have access to a multiplier (leverage) up to 20x in Forex mode and tools such as stop loss, take profit, trailing stop-loss and pending orders.
If your goal is to invest, then Stocks mode will suit you. Here you can buy shares and sell them immediately or hold onto them for as long as you like. But be aware that you can only trade using a live account in Stocks mode, not a demo account.
Exchange trading on Olymp Trade does not mean trading whole stocks but derivative instruments. Thus, you don’t burden yourself with the many nuances of owning stocks and get to focus on the financial result.
Making the right decision
Do you want to speculate or become an investor, or maybe your trading strategy already incorporates these two methods? With our many tools, technical support and informative blog, Olymp Trade will be your faithful friend, guide and mentor in any of your decisions on how to pick good stocks to buy.
Use the numerous tools provided by our platform, learn from professionals and train your trading skills on a demo account. Feeling confident already? Then register for a standard account and get to trading today with Olymp Trade. Together, we’ll get you up and running so that you can depend on yourself for financial success.Go to Olymp Trade
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
Securities of companies with significant potential for growth in quotations in the future.
A stock that is being traded at lower prices than its fundamentals (i.e., dividends, earnings, etc.) would indicate.
The time that an investment is held onto before it is sold.
A postponed order that limits losses on a trade to a specified level.
A postponed order that fixes income on a trade at a specified level.
In this mode, you make trades for a limited period of time and receive a fixed rate of return for a correct forecast about movements in currency, stock and other asset prices.
A type of order that can be set to stop the trade at a percentage below the asset’s current market price, rather than a set value.
An order that the trader sets to be executed only if the asset’s price reaches a certain value.