Stock speculation with various trading instruments allows beginners and experienced traders to earn a good income. But before working, the raider needs to gain high-quality knowledge in the field of technical and fundamental analysis and effectively apply it in practice.
What is speculation? Where does the income come from?
Speculation means making money on the movement of the price of an asset in a direction favorable to the speculator. That is, the task is to buy cheaper and then sell more expensive. The difference between purchases and sales constitutes the speculator’s income.
Although you can make money on the difference between selling and buying. This allows you to make a so-called short position or shorts. When going short, a speculator first takes an asset (shares, currency) in kind from the exchange. He will have to return this asset to the exchange. The speculator then sells the asset on the market at a certain price. If the price subsequently falls, the speculator buys the same asset at a lower price and returns it to the exchange. And he keeps the difference between sale and repurchase for himself. This way you can make money on the downward movement of quotes.
A reasonable question arises: who pays? Other market participants who are ready to buy the asset at the new price pay.
The price of an asset is formed in accordance with demand. If a company is promising and shows profits, then the demand for its securities grows. Similarly, the demand for the national currency of a particular country increases its exchange rate. Here, the state of the state’s economy plays a key role, the attractiveness of assets for foreign investors, and the volume of currency on the market also matters. That is, the basis of stock speculation is always economics.
However, quite often you can hear about unexpected stock market crashes or bubbles. This really happens. There is often panic or excitement in the market. The winner in this case is the one who was able to better and more correctly estimate the real value of the asset than others, as well as predict the behavior of the main part of the players.
Where to start
The key to the effectiveness of the process of speculation in the stock market is the correct choice of financial asset. One of the main criteria is the cost of the latter. The cheaper a trader can buy it and sell it more expensive, the higher the profit will be. Due to the fact that a speculator’s income depends on fluctuations in market prices, it is necessary to choose trading instruments with a high level of volatility.
At the next stage, you need to decide on the type of transactions to be carried out. Stock speculators prefer operations with a deferred execution date.
Cash transactions are in less demand among traders. This is due to the inability to conclude more contracts than are available. Down trading is excluded in this case.
One of the components of effective work on the stock exchange is choosing a reliable broker. The minimum amount required to open a brokerage account varies widely. Some brokerage companies set it within $1-5. The trader also pays commissions for performing transactions on the exchange and maintaining a brokerage account.
At the next stage, a transaction to buy (sell) the selected stock instrument is carried out. The following application options are available:
- by phone;
- through the Internet.
The second method is more preferable, because allows you to minimize the time spent on processing an application. Having a trader with a pre-compiled trading forecast, which includes the trading style, the methods used to analyze the situation on the stock exchange, and methods of risk management, will allow him to avoid concluding “rash” transactions, the probability of which is high.
How to choose the right broker?
First of all, you need to look at what reputation it has in the market, what share it occupies. In order not to take risks, you can use the services of state banks - Sberbank, VTB, Gazprombank, etc. They are practically free of the risk of bankruptcy, therefore they are the most reliable. In second place according to this criterion are the largest private banks - Alfa-Bank, Otkritie, MDM. Among the specialized brokerage companies, the largest and oldest are BCS, Finam, Aton. But the likelihood of their license being revoked is higher than that of large banks. At the same time, state-owned banks, for all their stability, do not provide the most favorable tariffs. In any case, it is not recommended to contact little-known brokers, even if their commissions are very attractive.
Working with a Specific Tool
Stock.
The fair value of shares is determined by the financial performance of the issuer company. Quotes are highly dependent on the release of certain corporate news, as well as on events in the industry. Serious movements are also observed during reporting periods.
The price of shares in the market fluctuates constantly. The potential earnings from speculation on them are high, as is the potential loss. To correctly predict price movements, you will have to learn the basics of financial analysis. For each security, the issuer's production indicators and development prospects are assessed. You will also need to carefully monitor the news background.
Top 7 stocks to make money on volatility
Stocks that are subject to volatility can provide investors with significant returns. To do this, the investor needs to have courage and the ability not to be led by emotions when the market begins to move.
From a statistical perspective, beta is a unit of measurement that quantifies the relationship between the price movement of an individual stock and the movement of the stock market as a whole. But from a practical point of view, this is simply an indicator of what dynamics a stock shows on a particular trading day relative to the market.
Next, we'll talk about seven companies whose stock beta is at least 1.7 and whose average trading volume per session is at least 1 million.
1. California Resources
California Resources is an oil and gas exploration and production company. To illustrate how volatile its stock is, consider this example: the day after the firm's financial results turned out to be better than expected, the stock price soared by more than 50%. Analyst Dave Meats believes California Resources' management has made significant progress in improving its balance sheet.
In addition, the company managed to generate an impressive free cash flow of $151 million in the third quarter. California Resources has a beta of 2.8, making it the most volatile company on our list. Morningstar analysts set a fair value estimate for shares of $16 per share.
2. Laredo Petroleum
Laredo Petroleum is an oil and natural gas producer operating primarily in the Permian Basin in Texas. Laredo shares have fallen nearly 80% over the past three years as the oil market has struggled to gain traction. However, Mits notes that the shares are currently severely undervalued, trading at less than $3 per share, given that the company is finally starting to show signs of significant changes for the better.
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The expert believes that Laredo is a very efficient company with a decent balance sheet. The company's beta is 1.7. Morningstar analysts have a Buy rating on Laredo shares. The fair price of the securities is $5 per security.
3. ON Semiconductor
ON Semiconductor is one of the world's largest manufacturers of electronic components used in various fields. Like many companies in the sector, ON has had a difficult year due to the cyclical downturn in the market. The company's operating profit decreased by more than
than 50% since the beginning of the year. However, analyst Seth Sherwood believes ON's third-quarter earnings and fourth-quarter guidance indicate the business is stabilizing. According to the expert, in the near future the trade war and the macroeconomic situation in general will continue to increase the volatility of the shares of this manufacturer. ON's beta is 1.8. Morningstar analysts recommend buying the company's shares, with a fair price of $26 per share.
4. Twilio
Twilio operates in the communications services industry and specializes in voice, messaging, video and other applications for software developers. The stock is up 30% in the past year but is down 26% over the past six months. The company's stock initially fell more than 12% after its financial results disappointed the market. However, analyst John Barrett believes Twilio's problems are temporary and will not impact long-term growth prospects. Twilio's beta is 2. Morningstar analysts recommend buying the stock, with a fair price of $132 per share.
5. Uber Technologies
About six months after its initial public offering, giant Uber is still trying to get used to seasickness. The stock remains below 30% of its IPO price of $45. But despite all the instability, Ali Mogharabi notes that Uber is on the path to becoming a profitable company. And this will happen, according to analysts, somewhere in 2024.
The company has successfully expanded its food delivery business with Uber Eats, so rising orders could well help boost its revenue in the second half of 2021. Uber has a beta of 1.8. Morningstar analysts recommend buying shares, and the fair value estimate is $58 per share.
6.United Rentals
United Rentals is the world's largest rental company, offering more than 3,300 classes of equipment. Its shares are up 22% over the past month, but analyst Scott Pope says the firm has a bright future ahead thanks to its industry-leading logistics and technology. United has expanded its equipment fleet and can now offer a much wider range of solutions.
Pope notes that leasing equipment is a cost-effective alternative to purchasing. United Rentals has a beta of 1.8. Morningstar analysts recommend buying the stock, with a fair value estimate of $185 per share.
7.Weibo
Weibo is a Chinese microblogging service that is often compared to the American social network Twitter. Weibo currently has about 500 million users. Analyst Chelsea Tam sees second-quarter growth as
The company's monthly active users (4.5%) and daily active users (3.9%) were quite encouraging. Weibo shares have fallen 24% over the past six months as the trade war between the US and China has dragged on.
According to Tam, Weibo shares appear undervalued, but the company's prospects look uncertain. Weibo has a beta coefficient of 1.8. Morningstar analysts set a fair value estimate for shares of $66 per share.
Bonds.
At their core, they represent a legally issued debt. That is, the issuer takes a loan from investors. And after some time it returns it, paying interest. This debt can be state, municipal or corporate. This instrument is more reliable than shares. After all, if a company goes bankrupt, money is paid first to bondholders (debt holders). And bankruptcies of states or municipal authorities rarely occur.
There is also interest income on bonds - a coupon, which is paid at maturity. But, in addition to income from the coupon, it is possible to receive income from the difference in purchase and sale. The fact is that bonds are always redeemed at par. Let's say, if the face value of a bond is 1,000 rubles, and the coupon is 10%, then upon redemption the investor will receive 1,100 rubles. However, if an investor managed to buy bonds on the market at a price below par (for example, 990 rubles), then in addition to the coupon income of 10%, he also receives a benefit of 10 rubles.
At the same time, it is more difficult to speculate in bonds than in stocks, since fluctuations in their value are small. And it is not always possible to buy a bond on the market at a price below par.
Classic trading strategies
Short-term trading strategies are classics of the speculative genre:
- Scalping.
- Intraday or day trading.
- Swing trading
Scalping
These are short-term transactions with opening a position up to 1-5 minutes, sometimes the time is calculated in seconds. The goal is to make money on price fluctuations, so highly liquid securities are selected. This strategy is often used in Forex, where commissions are lower. Beginners to trading, as a rule, start with this trading scheme. The income from one successful operation is very small, so in one trading session the scalper makes hundreds of transactions.
Diversification
To insure risks, diversification is often used - that is, investing not in one asset, but in several. It is reasonable. But you shouldn’t spread yourself too thin across a variety of assets, since it will be quite difficult to carefully monitor all of them.
It is better to diversify within one instrument - for example, buy shares of different companies. Or compensate for risky speculation in currencies and stocks with conservative investments in reliable bonds.
Author of the article, financial expert
Dmitry Tachkov
Hello, I am the author of this article. I have a higher education. Specialist in finance and banking. Worked in commercial banks of the Russian Federation for more than 3 years. I have been writing about finance for more than 5 years. Always on topic about the best deposits and cards. I make profitable deposits and receive high cashback on cards. Please rate my article, this will help improve it.
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