Stocks Demystified: 3 Key Strategies to Profit in the Financial Markets from Home
Updated: Jun 9, 2020
If you’ve ever asked anyone – a banker, teacher, investor – their rationale behind profiting from stocks, you’ll assuredly obtain a different answer each time. Everyone has their own way of making money with regard to the level of capital that they have: a person with $1 million will trade differently to one with $1 thousand.
This article is a small insight into how you can universally profit from stocks: whether you’re a millionaire or a spotty teenager, these three critical aspects will guide you into making profitable decisions. Here they are:
1. Take Advantage of Blue Chip Stocks
A Blue Chip stock refers to a multinational company that has been operating for multiple years, often more than a decade. These companies generally sustain the ability to provide high-quality products/services, encompass reliability, and operate profitably when economic times are more difficult than usual.
A reason why these companies are extremely reliable could be attributed to the fact that they possess incredibly high levels of cash: the ultimate advantage in the game that is the stock market. This is significant because the metaphorical weapon of cash can be used to regain momentum if the company’s stock ever drastically falls, which will inevitably bring the stock price back to where it originally was.
For example, consider the circumstance when Facebook Inc. were unlawfully in-diligent and supposedly leaked a multitude of personal data to cloud giant Cambridge Analytica earlier in 2018. This scandal caused Facebook’s earnings and brand reputation to significantly deteriorate, and therefore resulted in their stock price plummeting from $209.94 in July 2018 to $124.95 in December 2018. Facebook suffered a 40% decrease in price over the period of 6 months: certainly one of the gravest short-term downfalls that any Blue Chip stock has ever experienced since the 2008 Financial Crisis.
Figure 1: Graphical Representation of Facebook’s Stock Price History
However, despite that horrific chain of events, every investor knew that Facebook possessed an undeniable weapon, the metaphorical lifeline they could leverage to bring themselves back up: cash.
They had billions and billions of cash.
This is supremely why Facebook stock was demanded even more when it fell, because all investors knew that the stock would return to its initial value within some point shortly afterwards. The possession of such a multitude of cash suggested that no matter what scandal, legal troubles or fines Facebook had to incur, they would still be able to operate with the same efficiency, which is exactly the reason that investor’s demanded more and the stock price then returned to the $200 mark 6 months later.
The main lesson here? Get in whenever times are bad for Blue Chip stocks – Facebook, Coca Cola, IBM, Johnson & Johnson, Apple, Microsoft etc. etc. – because they will always be able to use their infinitely deep-pocketed war chest to aid their way out of corporate troubles: i.e. you'll be able to buy low and sell high, which is your one way ticket to triple-digit percentage profits.
2. Pick a Stock BEFORE it’s hyped
This is potentially a very difficult thing to do, because we tend to only hear about certain equities when they’ve become viral and people have already begun trading it very heavily.
One such example is the recent marijuana stock craze, as some of these companies have been experiencing triple-digit growth levels within a single year in itself. Investors who were in before the hype began sustained a twofold or even threefold growth of their initial investment: a handsome reward for their initial diligence and resilience when purchasing the stocks in the first place.
A good way to comprehend or assume whether a stock will be hyped soon is to remember a phrase by MJ DeMarco: “For a company to make millions, they need to impact millions”. This means that keep your eye out for something that’s under-the-radar, but millions of people could be using soon.
For this, you’d have to consistently keep your head in the game and utilize news platforms to your advantage: i.e. look at a certain market and get in the trend before millions begin to use it. For example, I bought MasterCard stock in 2017 – when I was still new to trading – a while before FinTech and digital payment processing systems became a huge hit.
I decided to pursue this equity because I came across an article beforehand that said FinTech had the potential to be accessible to millions of people in the near future. And it sort of made sense, right? Everything was moving towards the phone and the world was incrementally becoming cashless, so I thought it might work and therefore proceeded to buy the stock. Here’s the result:
Figure 2: Trade Receipt for MasterCard
While a 45% profit is certainly desirable, you need to remember that the key to achieving this was through coming across an article on the internet, so if you want to make money like this repeatedly, you need to invest in your knowledge beforehand. I can humbly admit that reading the article which tipped me off about the future of payment processing systems was somewhat of a fluke, because I didn’t mean to come across it. But boy, am I glad I did.
This is why I now invest some time into weekly readings of current market dynamics, so that I can attempt to catch each trend before it becomes popular and repeatedly make profitable investments like the one shown above. Investing in your knowledge is something that’s been consistently preached by the wealthiest investors, yet is still ignored by aspiring money-makers on a daily basis.
Change that today, and watch as your income takes a turn you might’ve never expected.
3. Staying in the Markets:
Panic. Emotions. Fear. These three are undoubtedly the pinnacle of what causes people to lose money in the stock market.
If you want to profit in the same manner as successful investors such as Warren Buffet, Ray Dalio and Tony Robbins, you need to stay in the markets at all times.
Why’s that? One reason:
a) Missing bullish days will cost you, badly.
Research shows that investors who missed the 10 best trading days of a fiscal year resulted with profits almost half of what they could’ve gotten: while the average market return was 9.9%, the aforementioned investors would’ve had to settle with a mere 5% profit. An excellent graphical representation of these consequences is shown below:
Figure 1: Annual Investment Return vs Number of Best Trading Days missed
As you can see, the more bullish trading days you miss, the greater your profits fall. In fact, if you’ve missed 30 to 40 of the optimal investing periods, you actually tend to suffer a loss, which is not something you aim to endure as an aspiring money-maker.
Hence, this is supremely why you need to ensure that you are staying in the markets at ALL times; both because you don’t want to be missing the best trading days AND the fact that the market always recovers into growth in the long run (see this article), so you do not have to let panic hinder your initial investment decisions and therefore facilitate a short-term mindset.
If you cast aside your emotions and retain your diligent and evaluated positions in the market, you’ll assuredly be on the right path to growing your investments with each fiscal year.
It only takes a little effort to look out for certain things and implement a stable mindset, both of which can set you directly on your way to the profits you envisioned. By leveraging the short-term downfalls of blue-chip stocks, taking advantage of trends and sustaining your positions in the market, you’ll be mimicking some of the gloriously successful strategies used by world-renowned investors we know today.
To paraphrase a quote that's ingrained in my mindset before making any investment; John Paulson said: “Whether the stock market goes up or down, you can't adjust your portfolio based on the whims of the market. Stay true to your strategy and never pay attention to noise that could surround any particular investment, ever.”
Keep that in the back of your mind as you pursue more investing, and relish in the growth of your financial mindset with every passing year.