If you’re new to the stock market you are probably tempted to trade equities to make money quickly. Looking at company share price charts you can see some rising and others falling, or even plummeting. Therefore it might seem that the obvious way to make money is to move investments between stocks as they go through these different phases. Unfortunately this volatility is often the downfall of new traders as professionals and market-makers earn money at their expense.
This is why Warren Buffett describes the stock market as “a device for transferring money from the impatient to the patient”. Some traders will still make money but they face an uphill battle to make profits above the costs of commissions, and some estimates suggest up to 90% of traders lose money.
How you can make money trading
Professional traders are often not concerned with the company that they are investing in, choosing instead to focus on which way prices will move. There are a multitude of different reasons why a stock price can change. Here are some:
- Company news
- Political factors
- Big buyers
- Big sellers
- Shorts
- Market makers
- Trader activity
Making money from these factors is easier said than done. For example, company news is the obvious cause of price movements but the price moves ahead of time to discount the likelihood of said event. Therefore the price might actually fall on good news as traders who had bought in advance sell their positions. You are unlikely to beat the market by guessing the outcome of political and company events and professionals have access to a wealth of information that you will not.
Who are market-makers?
These little known organisations set the different buying and selling prices for anyone buying and selling a stock and essentially act as a bookmaker for the stock market. The more trading that is done, the more money they will make. Their purpose is to create liquidity in the stock market, but they are rumoured to encourage over-trading by increasing volatility. As a result of buying though market-makers, traders can lose around 5% immediately on each trade.
A long-term view
This brings me onto investing. There is another factor that works in investors’ favour, and that is compound interest. Described by Einstein as the “eighth wonder of the world,” this can provide exponential returns on your original investment.
While stocks may sometimes fall for extended periods, as is happening with most stocks at the moment, investors focus on businesses that generate profits which increases the value of stocks over time.
An investor is more likely to be comfortable riding these ups and downs by taking a long-term view. Investing may seem slow to begin with, but in the stock market the tortoise normally beats the hare. Just ask Warren Buffett.
