06 November 2014

Most of the Time, It Does Not Really the Hot Stocks that Make Money For You - November 2014

I understand how brokers make money. Most of the time, they will recommend you to buy stocks based on the current "popular" topics. And those counters on the top volume board will get many traders to target on. Why would so many buyers chasing after the "hot" stocks?

Reason #1:

It is easier to buy and sell (in other word, it is easier for buyers to buy and then sell it off within a few seconds). Based on some conventional theory, you could reduce a risk level for a counter if you could buy and sell easily. This is what we call - Liquidity Risk. There are too many investors targeting on those counters with high trading volume / so called liquidity so that they could easily trade it and run away if needed.

Reason #2:

Normally for hot counters, they will have some reasons for public to chase after. Some may try to long for good reasons or some may go and short for bad reasons. If investors solely trade based on the only reason that it is a hot stock, then it may just force the investors to sell it off later when the trading volume is low (by that time, the share price maybe lower due to the fact that the liquidity risk is higher - go back to my reason #1).

Reason #3: 

Some investors / traders just don't have any idea on what they want to invest / trade. So they may just follow the market trend (buy or sell what most people will trade). This is only good for those investors who have strong belief after they have done their own homework. If you simply just follow the market, you may later find yourself lost in the middle.


So Why Do You Need to Change the Mindset? 

I also understood that some of the investors make money by NOT trading the hot stocks. They would rather go and wait for the quiet period to come, so that they could buy the counters at cheaper price. For some counters, they have been neglected by the public due to the liquidity issue (daily trading volume is very low, that you gotta wait for a few more days to complete a whole big chunk of purchase). Instituitional investors may also not favor in those small-medium cap counters or under traded counters as they have to give reasons to the stakeholders why they buy them. It is better for them to just follow what other fund house will buy in order to not to differentiate too much from the peers. (After all, the performance bonus of the fund manager is just to beat the market, not 100% different from the market).

Many hidden gems were previously under-covered by most analysts / fund managers. It may be good if we could find it before most of the people started investing in it.

The other reasons is that, there is low trading volume during the bear market. Most people especially traders would go and have a rest during bear market as they could not find a good opportunity to trade short term. It maybe an opportunity for certain investors to slowly pick up their own choices of investment during the bear market.

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