Why tips for share trading don't work?
Investments in stocks have been providing excellent returns in the long run. Stock market has been giving 20% annualized returns over the last 10 years. While investors want to make money through stock markets, several investors follow tips for share trading and lose money.
Why tips for share trading don't work?
Share trading brokers recommend stocks based on the following 3 major categories
- Share trading tips based on fundamental analysis
- Share trading tips based on Technical analysis
- Share trading tips based on a positive or negative news of a company
Tips for share trading based on fundamental analysis
We all know that fundamental analysis plays a major role when someone wants to invest in a stock. We need to look at revenue growth, profit growth, growth prospects etc., while selecting a stock. When an investor has invested based share trading tips where in it indicates good fundamentals of a company, are there still chances of an investor losing money? When several brokers have been recommending Infosys, I invested Rs 1 lac and ended up selling at same price after 2 years. I have observed few points based on experience.
- Fundamentals would be the starting point in choosing a stock, but it may not be the only point.
- Industry performance: When you are doing share trading based on tips, consider how the industry is performing. When I purchased Infosys, IT industry was in a down trend due to budget cuts in US, all IT stocks were down.
- How long you can wait? In 2006, I purchased Infosys and was holding for a 2 year period and I could not make out any money (I purchased at peak price). So, I feel, if you can hold any stock with good fundamentals for long term, you would benefit.
- Is the share price has reached its peak? This also could be a good indication about whether the tips for the share trading would work or not. If the stock price recommended has reached its peak price, it would be high risk in investing such stocks unless the stock market is in a bull run.
Tips for share trading based on Technical analysis
Technical analysis is a methodology in deciding the timing of investments which is important to make investment decisions. This is done by forecasting the direction of the prices through the past market trends, mainly price and volumes. Technical analysts study the share price pattern such as well known head and shoulder or double top/bottom reversal patterns. It also involves studying technical indicators such as moving averages which provides lines of support and resistance levels. Why share trading tips may not work based on Technical analysis
- Charts show positive move, but fundamentals may not be good: Tips based on share trading may be independent then fundamental analysis. I have seen several cases where stock brokers recommend stocks where the stock prices are increasing where the company good fundamentals are not that good. Since based on technical analysis they might be good and they may move for a short term, but in the long term, they fail and share price falls.
- Charts show positive move, fundamentals are good, but still share price falls: This is another scenario where fundamentals are good, charts show positive momentum, but still share price may fall. There could be several reasons like investors may fear beyond paying certain price for the share, industry may show down trend etc.,
Tips for share trading based on positive or negative news of a company
I have seen several stock brokers recommending stocks based on the positive or negative news about the company. I agree that the price fluctuation happens when there is news which can affect the business. However, the effect based on news where there is no significant impact would last in 1-2 days or even within few hours. By the time the news spread, the stock price would have already been affected due to this. In such cases, the investment done based on share trading tips may not work.
Conclusion: Investment based on share trading tips may not always work. It could be tips for share trading based on fundamental analysis or technical analysis or share trading tips based on news. I have seen several investors losing money who invests based on share trading tips.
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