As we all know, stocks and cryptocurrencies are two of the most popular investments. In many cases, the latter has surpassed the former in terms of returns. However, when it comes to their behaviour and performance, the two are intrinsically different. Stocks depend on the performance of the inherent companies and international markets while cryptocurrencies are driven mainly by speculation and hype. Furthermore, one can follow a chain of logic and reasoning to decide which stock is worth investing but in the case of cryptocurrencies, the decision mainly relies on popularity.
If we are to consider these two asset classes, then stocks are considerably safer than their new counterparts, although both of them are subject to risks. Additionally, stock markets are regulated by governing bodies like SEBI while cryptocurrencies are largely unregulated. As a result, the ideal strategies to trade in the two assets will be considerably different than each other. In this article, we will take a look at how you can make the most of trading in stocks and trading in cryptocurrencies.
Part 1: The Art of Trading Stocks
Broadly speaking, there are two ways to approach investing in stocks – you can either purchase and hold on to your stocks for a long time or you can opt for intraday trading and settle your trades during the trading session itself. Whatever may be the case, the end goal behind the two approaches is simple – to sell your stocks at a price greater than what you bought them for.
Most investors opt for the first option as it requires less effort. They don’t bother themselves with the daily movements of the market and believe that the company’s fundamentals and financials are strong enough to reflect in its stock. Intraday trading, on the other hand, requires quite a bit of skill as it involves carefully tracking and studying the markets to find the opportune moment to make a profit.
Whichever path you choose as an investor, you should pay heed to the points mentioned below. They will help you greatly to achieve success in the markets.
- Read up on investing in stock markets
A wise man once said that the journey of a thousand miles begins with a single step. Similarly, in your quest to become a successful investor, you must start by learning about stocks and stock markets. If you dive in with absolutely no knowledge, then you are bound to lose money.
There are plenty of books available on the subject written by the likes of Peter Lynch and Warren Buffett. Similarly, there are countless tutorials and videos online which teach you about the intricacies of stocks. It may be time consuming and boring too, but the effort put here is going to be well worth it. The more you know, the less likely you are to make mistakes.
- Know how to analyse the fundamentals of a company
Stocks, unlike cryptocurrencies, move up or down because of the performance of the company. If a company is performing poorly, then its stock is most likely to go down. There are plenty of people who have lost money in the markets just because they didn’t examine the company they were investing in. You must not make that mistake.
You should learn how to interpret important financial documents like balance sheet, quarterly results, profit & loss statements, etcetera. This knowledge will give you a good idea of how well a company is performing in comparison to its peers. By contrast, it will also tell you how well the company is placed to endure difficult economic conditions.
Additionally, you should also look at other important factors like management, sectors, unique selling points, future goals while evaluating a company. By understanding these fundamentals, you will be able to judge the economic health of the company and its growth prospects better. There are countless sites on the internet which will help you with this, one of which is Bankbazaar India.
- Be up-to-date with major news and developments
There are a lot of factors which affect the movement of stocks. From the performance of a company to major policy changes implemented by the ruling government, there are a plethora of national and international events that can very well impact the price of your stock. For instance, the trade feud between China and the U.S can have severe repercussions in markets around the world. Similarly, history is full of instances where the markets have plummeted owing to an intricate web of reasons.
It is impossible to predict what is going to cause the next crash, if any, but keeping up with the latest news and developments will help you mitigate that risk to a certain extent. It will also give you a general sense of where the market is heading and help you evaluate your investments accordingly.
- Learn a couple of techniques to analyse stocks
If you are interested in intraday trading, then you should definitely consider learning a couple of techniques to analyse stocks. Technical analysis involves understanding and interpreting two-dimensional charts. The most popular chart is the candlestick chart and based on this, there are many indicators like Support and Resistance, Bollinger bands, Pivot points, Relative Strength Index, etcetera. Initially, it may be a bit tricky to understand these concepts but once you get the hang of it, you will find yourself navigating through the labyrinth of the markets rather easily.
- Always have an entry and exit point
While investing in the markets, it can be quite easy to lose yourself to your emotions. This is particularly true in the case of intraday trading, when the prospect of a loss can drive you to make irrational decisions. Similarly, when you are making a profit, you may be tempted to hold on to your stock and see where it takes you. However, you must try to avoid those kinds of situations. There have been plenty of instances where people have invested in the markets, witnessed their stocks do superbly and instead of cashing out, they decided to hold on because of their greed. Eventually, the stocks collapsed and shed all the gains they had made in the process.
That’s why, before you invest in a particular stock, you should have a clear idea of when you are going to sell that security. As a day trader, you should also consider the importance of a stop-loss order. This kind of order can be used to sell a security when its price reaches a predetermined value. If you feel that the price of your scrip may go down, then you can limit your losses by placing a stop-loss order in advance.
Now that we know how to trade stocks the right way, let us take a look at cryptocurrencies.
Part 2: The Art of Trading Cryptocurrencies
Trading cryptocurrencies is far more complex than trading stocks. When you invest in a stock, you have a list of reasons for your decision – company’s performance, dividends, future prospects, the performance of the sector, et cetera. However, in the case of cryptocurrencies, the only reason you may have is that everyone is doing it or that they can deliver substantial returns in a very short period of time.
However, in 2018, the cryptocurrency bubble collapsed and as a result, the prices fell dramatically. Some of the most popular coins like Bitcoin, Ripple, Ether, and Litecoin have lost more than 200% in value, in a matter of days, if not, weeks. As of June 2018, the cryptocurrency market is incredibly volatile and investing a huge sum may not be that feasible. At the same time, there are many who believe that cryptocurrencies will rise again. If you are one of them, then you may want to consider the following pointers:
- As far as possible, choose popular cryptocurrencies to invest
Some of the most popular cryptocurrencies are Bitcoin, Ether, Ripple, Litecoin, and Golem. Of course, there are many more coins in addition to these, but the point here is to invest in a cryptocurrency that is popular and has a real-world application. For example, Ethereum is a platform to develop blockchain applications. Similarly, Golem is a global marketplace for computing power. These kind of projects are definitely interesting and as they become more popular in the future, one can expect their prices to go up.
If you choose a lesser-known cryptocurrency in the hopes of finding the next Bitcoin, be sure to do a thorough research on it. Read the whitepaper and other relevant documents to understand the project and see if it is worth investing.
- Always store your coins in cold storage
Ever since cryptocurrencies came into existence, there have been several instances where the cryptocurrency exchanges have been hacked. Consequently, investors lost a great deal. For this reason, it is strongly recommended that you don’t store your digital currencies in the exchanges or even online.
Once you purchase your desired cryptocurrency from a trading platform, have it transferred to your wallet like Nano Ledger S or Trezor. You can also consider paper wallet as an option to safely store your keys.
- Always diversify
Whether you are investing in stocks or cryptocurrencies, it is always good to diversify. Instead of putting all your eggs in one basket, you should diversify and invest in different stocks/cryptocurrencies. If you invest all your money in one asset, then it is going to be a sure-shot recipe for disaster. If you invest in multiple assets, then the chances of losing your money in all of them are considerably low. Even if one asset tanks, the other assets may perform well and help you make a decent profit.
Between stocks and cryptocurrencies, stocks are a much better option. The prospect of making a quick buck may entice you, but the lack of regulation and high volatility in the cryptocurrency space is definitely off-putting. However, as an investor, it is your prerogative to decide where you want to invest your money. Whatever may be the case, be sure to research thoroughly.