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How Research Helps in Stock Trading
Every expert in the stock market trade advises traders to do exhaustive research before making any buy or sell decision. This is because research is the key to a successful stock trading career, as it gives the trader insights on the prospects, good or bad, of a company thereby affording enlightened decision-making for the trader.
Many traders have horrid experiences of seeing the price of a stock they hold suddenly plummet. In a quick defensive response, they quickly sell off their holdings even at a loss only to see the same dreadful stocks rebound and take unprecedented gains a few days later. Such wide swings in the market are common occurrences, and traders could avoid being victims of a double whammy if they do diligent research before they buy or sell their shares.
If the decision to buy is based on sound fundamentals, traders can safely watch as the shares took some dips. Historical indicators of the share in question or the sector in which it belongs would surely show similar plunges in the past, perhaps due to corrections or general market sentiments. The same historical data would also indicate quick price recoveries. Based on this information, the trader could determine the optimal time to sell, without adding risks to his capital. Market volatility is not a reason to sell but it can seem like one if you have not done your research well.
A classic example showing the importance of research occurred in November 1997 to the stocks of Quiksilver (NYSE: ZQK). If you happened to buy the stocks of the company and saw it fall 30% the very next day due to reduced earning reports, you would probably sold off your stocks as a reflexive reaction. However, on the day that the stocks dipped, Quicksilver opened several factories and the reduced earnings were due to expenses in building the new factories. Further research would show that demand for the company's products (teen clothing) remained high and, hold your breath, the demographics of the target market (teens) is expected to increase until 2010. All these factors paint a very bright future for the company and if you off-loaded your shares on that fateful day, you would probably be banging your head to the wall after a few days, when share prices of Quicksilver promptly rebounded.
Research is especially important in value investments, as it gives you the real story behind a company's exceeding its performance or underperformance at any given time. Day traders generally rely less on research, or let me correct that, day traders focus their research to key aspects of the trade which directly affect their short-term hold on the stocks such as historical averages and breakouts, but even these partial research requires some moments to dig up information and analyze newly discovered info which may very well make or break their positions.
The advice of the experts is therefore a wise one. Do your research and be properly armed with the knowledge you need in a successful stock trading career. If you don't, you're much like a sailor who haphazardly ventures into uncharted waters without any navigational aid.
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