Four Different Styles Used for Trading Stocks
While many investors try to emulate “buy and hold” investors like Warren Buffett, not everyone has the conviction or the patience to wait out positions over years or decades.
For active investors in the market, it’s pretty common to see switching in and out of positions – sometimes over the course of months to years, and sometimes on a much more frequent basis.
Trading Stocks: Examining Four Styles
Today’s infographic comes to us from StocksToTrade and it highlights key differences between four trading styles, along with the methods frequently used to identify each trade.
The styles range from having holding periods of months or years, all the way down to mere minutes!
As these holding timeframes get smaller, the focus typically shifts from evaluating a stock’s fundamentals to gauging short-term technical indicators.
1. Position Trading
Position traders look closely at a company’s fundamentals in order to accumulate sizable positions that they hold for periods of months or years. This could be done using growth investing or value investing methodologies. Meanwhile, technical analysis can be used to time each individual trade.
2. Swing Trading
Swing traders go with the flow. They aim to capture the gains of a stock (or options) as they attain short-term momentum in the market. This can be achieved by having a watch list of many interesting stocks, and constantly evaluating technical indicators until an opportunity is spotted.
3. Day Trading
The notorious day trader is usually glued to his or her computer screen, trading stocks throughout the course of a day. It’s a full-time job not meant for the faint of heart; however, there are people out there who have developed very effective strategies as well as the work ethic to do it strategically.
4. Scalp Trading
In scalp trading, it can be said that small profits add up. The goal here: to sell every time a profit window appears, and to do so many, many times!
This usually involves thousands of trades in a year and access to a live feed and direct-access broker. Scalp trading also requires a strict exit strategy, as any whiff could erase many previous gains.
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The Best Months for Stock Market Gains
This infographic analyzes over 30 years of stock market performance to identify the best and worst months for gains.
The Best Months for Stock Market Gains
Many investors believe that equity markets perform better during certain times of the year.
Is there any truth to these claims, or is it superstitious nonsense? This infographic uses data gathered by Schroders, a British asset management firm, to investigate.
What the Data Says
This analysis is based on 31 years of performance across four major stock indexes:
- FTSE 100: An index of the top 100 companies on the London Stock Exchange (LSE)
- MSCI World: An index of over 1,000 large and mid-cap companies within developed markets
- S&P 500: An index of the 500 largest companies that trade on U.S. stock exchanges
- Eurostoxx 50: An index of the top 50 blue-chip stocks within the Eurozone region
The percentages in the following table represent the historical frequency of these indexes rising in a given month, between the years 1987 and 2018. Months are ordered from best to worst, in descending order.
|Rank||Month of Year||Frequency of Growth (%)||Difference from Mean (p.p.)|
There are some outliers in this dataset that we’ll focus on below.
The Strong Months
In terms of frequency of growth, December has historically been the best month to own stocks. This lines up with a phenomenon known as the “Santa Claus Rally”, which suggests that equity markets rally over Christmas.
One theory is that the holiday season has a psychological effect on investors, driving them to buy rather than sell. We can also hypothesize that many institutional investors are on vacation during this time. This could give bullish retail investors more sway over the direction of the market.
The second best month was April, which is commonly regarded as a strong month for the stock market. One theory is that many investors receive their tax refunds in April, which they then use to buy stocks. The resulting influx of cash pushes prices higher.
Speaking of higher prices, we can also look at this trend from the perspective of returns. Focusing on the S&P 500, and looking back to 1928, April has generated an average return of 0.88%. This is well above the all-month average of 0.47%.
The Weak Months
The three worst months to own stocks, according to this analysis, are June, August, and September. Is it a coincidence that they’re all in the summer?
One theory for the season’s relative weakness is that institutional traders are on vacation, similar to December. Without the holiday cheer, however, the market is less frothy and the reduced liquidity leads to increased risk.
Whether you believe this or not, the data does show a convincing pattern. It’s for this reason that the phrase “sell in May and go away” has become popularized.
Investors should remember that this data is based on historical results, and should not be used to make forward-looking decisions in the stock market.
Anomalies like the COVID-19 pandemic in 2020 can have a profound impact on the world, and the market as a whole. Stock market performance during these times may deviate greatly from their historical averages seen above.
Regardless, this analysis can still be useful to investors who are trying to understand market movements. For example, if stocks rise in December without any clear catalyst, it could be the famed Santa Claus Rally at work.
A Visual Guide to Stock Splits
If companies want their stock price to rise, why would they want to split it, effectively lowering the price? This infographic explains why.
A Visual Guide to Stock Splits
Imagine a shop window containing large pieces of cheese.
If the value of that cheese rises over time, the price may move beyond what the majority of people are willing to pay. This presents a problem as the store wants to continue selling cheese, and people still want to eat it.
The obvious solution is to divide the cheese into smaller pieces. That way, more people can once again afford to buy portions of it, and those who want more can simply buy more of the smaller pieces.
The total volume of the cheese is still worth the same amount, it’s only the portion size that changed. As the infographic above by StocksToTrade demonstrates, the same concept applies to stock splits.
Like wheels of cheese, stocks can be split a number of different ways. Some of the more common splits are 2-for-1, 3-for-1, and 3-for-2. Less common splits can take place as well, such as when Apple increased its outstanding shares by a 7-to-1 ratio in 2014.
Why Companies Do Stock Splits
Of course, stocks aren’t cheese.
The real world of the financial markets, driven by macro trends and animal spirits, is more complex than items in a shop window.
If companies want their stock price to continue rising, why would they want to split it, effectively lowering the price? Here are a some specific reasons why:
As our cheese example illustrated, stocks can sometimes see price appreciation to the point where they are no longer accessible to a wide range of investors. Splitting the stock (i.e. making an individual share cheaper) is an effective way of increasing the total number of investors who can purchase shares.
2. Sending a Message
In many cases, announcing a stock split is a harbinger of prosperity for a company. Nasdaq found that companies that split their stock outperformed the market. This is likely due to investor excitement and the fact that companies often split their stock as they approach periods of growth.
3. Reducing Capital Costs
Stocks with prices that are too high have spreads that are wider than similar stocks. When spreads—the difference between the bid and offer—are too large, they eats into investor returns.
4. Meeting Index Criteria
There are specific instances when a company may want to adjust its share price to meet certain index requirements.
One example is the Dow Jones Industrial Average (DJIA), the well-known 30-stock benchmark. The Dow is considered a price-weighted index, which means that the higher a company’s stock price, the more weight and influence it has within the index. Shortly after Apple conducted its 7-to-1 stock split in 2014, dropping the share price from about $650 to $90, the company was added to the DJIA.
On the flip side, a company might decide to pursue a reverse stock split. This takes the existing amount of shares held by investors and replaces them with fewer shares at a higher price. Aside from the general stigma associated with a lower share price, companies need to keep the price above a certain threshold or face the possibility of being delisted from an exchange.
Stock Splits Happen, but are not Inevitable
Alphabet will become the most recent high profile company to split their stock in early 2022. The company’s 20-for-1 stock split aims to make the share price more accessible to retail investors dropping the price from approximately $2,750 to $140 per share.
Conversely, Berkshire Hathaway has famously never split its stock. As a result, a single share of BRK.A is worth over $470,000. Berkshire Hathaway’s legendary founder, Warren Buffett, reasons that splitting the stock would run counter to his buy-and-hold investment philosophy.
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