Is trading in stock markets a luck business ? or does it require skills ? How many investors remain making profits for a long time or become rich and stayed one ? I know you might tell me that Warren Buffet is the man ! But was he lucky or does he posses an outstanding skills in investing?. I think he has the two factors, by being lucky and a man of craft.This will open a new discussion called: “Probabilities” and I’m no expert in that field, but i know some basic knowledge that I can use now to validate my arguments.From my experience of 7 years of securities trading in US market I know for sure that most traders depend on luck. They are in the market like gamblers in Casinos . They are trading for the thrill. Of course there is an exception here , and I mean the sophisticated investors, traders and institutions.
Every one of them (the 2 teams) are looking for the profit. But how do each one of them look at the trading process ? Like I said gamblers and yes I call them so because they depend on luck and probabilities are so different than the professional ones ! But in What way ? The professional do their best to filter the securities by choosing the right bargain . I didn’t mention the long process of filtering , you may ask me why ? Because at the end of financial calculations , investors face a critical phase : that is the decision making phase to pick the hot stock. While the gamblers don’t get involved in the previous process, all they are after is the quick profit and the thrill of trading and sometimes the fear of losing. Some gamblers certainly go through a process which is obviously different than common security analysis. What makes both different is the mentality of each one. The investors group use skills finalised by sophisticated decisions. Gamblers however, value profit without knowing the mechanics and fundamentals of stock markets.
Both teams are exposed to luck and losing money, as no one can anticipate the markets surrounded by many economic and political influences . We live in an enigmatic and uncertain world anyhow. No matter how skilful you are , you can not control the consequences . You can get lucky if you are good and gain money. Still you can win many trades while being merely lucky with no skills at all. For example by following experts advice or getting to know insiders. I know many investing-coaches who claim that they are experts in stock markets but still lose and close many of their own portfolios . Despite that they continue giving lectures and courses. I call that a foolish act because these morons are fooling themselves and their clients. I’m sure you have seen them every where and not just in the finance industry. What was the reason for them for not being able to beat the market ? Was it of their lack of technical knowledge ? I doubt it. Was it because of the “Market Efficiency hypothesis” theory ? Which states that you can not beat the market by using technical analysis or manipulating the insiders information to profit before every one else ? I don’t believe in that theory , because in reality there are plenty who profit from the markets by using technical charts and insiders secrets.
All I can say is that there are winners and losers in securities markets and its irrational to categorize their actions into “The seven habits of Highly effective or ineffective investors” book . because even if you apply those habits , it does not mean that you are isolated from risk and uncertainties. I still trade despite of what I just said and I did not write this article to put you off trading or investing. My point is to illustrate that investing is mainly a probability game, however with a spice of skills it can become a non-gambling profession.
I was searching for a stock market simulation game in the web and in iTunes. The search was good as I discovered plenty but with different quality. Before I tell you what I found , I would like to talk about stock market games and what they can do for us such as advantages and benefits.
Stock market simulation is an educational tool used today for educational purposes. The main users of this technology are professionals who are involved in investments. They practice their own techniques and strategies in order to improve their skills. Some schools and universities do use them to teach their students stock trading. The simulators mostly follow real market data in real time, they give you the feeling of being truly in the market.
Some organisations and schools organise stock trading competitions. Students are encouraged to manage virtual stocks portfolios and the winner of course is the one with more money or higher money return. My college for example—Bangor business school participates in a national event annually called “stock market challenge” .
Advantages of stock market simulation:
1- Learning by doing :They can teach you how trading and investing works by showing you the basics.
2- Familiarity with industries and companies: You can also get familiar with company names and industries.
3- Portfolio management: You will also learn how to work on your portfolio and manage it.
4- Wisdom and expertise: No one can succeed without making mistakes , learn from your mistakes and apply what you learn in real money
Disadvantages:
Risky behaviour: You are investing virtual money, so you might act with overconfidence and you get lucky with profits because the market trend is your friend (for now). You might think you are ready for the real world and your strategy is superb, you take your wallet and foray some real stocks , BOMB ! You lose money. What happened ? your current strategy don’t work this time. So to protect your self from being caught in this kind of situation, don’t rush into real money, take your time and keep practicing.
Experience bias: I think you know some people who have been driving cars for many years but still bad drivers. Either their skills are not good or they have developed bad habits. The same case goes for investing. No matter how much time you have invested playing stock market game, that does not necessarily make you a good trader. You must learn the rules of the game. Read books , attend seminars and interact with experts- share with them your experience and ask for a feedback. Investing my friend is a group (team) activity and should not be done alone.
My personal advice : Its OK to make mistakes that’s what the simulation is for. However, if you want to learn best , then pretend that the virtual portfolio is a real one.You can act serious by doing what most successful investors do before buying stocks. I wont mention their habits or the process they go through here in this post because its lengthy and worth to be explained properly in separate posts. I will consider it in the future.
There are plenty of simulators out there, I have tried 3 and here they are :
If you recall my previous post about portfolios : Portfolio 101 . I have talked about the concept of building a portfolio which is diversification . But most importantly the main objective of building a portfolio is to increase return while eliminating risk as much as possible. I will let you now watch the father of Modern Portfolio Theory Harry Markowitz , to explain this theory himself , Im sure no one can explains it better
I think most financial markets (Stock exchanges) are now recovering from the losses that they have encountered last year during the financial crisis. You can take a look at this chart to see where I got this information from. Maybe its a good time to enter the market , maybe not . I’m not selling an advice here , I just want to explain the concept of portfolio as you will discover later on.You have $5000 – maybe more -in your pocket , and you want to invest your money in those markets . So you start to think which company or which equity (what I mean by equity is any thing( stock , bond or option) that is being bought or sold in the stock market) , you might think about investing in the currency exchange. You might notice that stocks behave differently or in opposite direction . That might make reaching a decision a little bit harder. I might think like you which stock to choose, stock A or stock B ? Stock A might move in opposite direction as stock B . They both represent good and solid companies from financial view. So which option ? option one , option two ?There is a third and a middle option ! why not buy both . Doing that is what is called diversification . Your money wallet that represent both stocks are now called portfolio .
What does portfolio mean ?
“A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investorsand/or managed by financial professionals. ” ( Investopedia )
Most investors want to maximize their return and thus making more money by eliminating risk as much as possible that is the main concept of portfolio theory. Today I saw a nice software that does a good job in portfolio management : Manage Invest . The software belongs to an Australian company called MySF Pty Ltd . This application applies the concept of diversification because it lets you manage and track plenty of investments up to 1000 . It also includes TAX calculation based on many countries , and you can add your country if its not available.This TAX feature is valuable because it lets you know the effect of TAX rate on a particular investment , that will make your portfolio more efficient. The purpose of my article is to show you the concept of portfolio in brief by showing you a real tool (software). I will dig more in this topic in future articles . Have fun
