Methods to Make Money with Stocks with the Investopedia Stock Simulator - Admission/Application Essay Example

? Methods to Make Money with Stocks with the Investopedia Stock Simulator Introduction A stock market has always been a place for many to try and make a killing through skillful and methodical approach. Peter Lynch, Warren Buffet, George Soros are some of the well known names having made their fortunes in the stock market and inspired numerous people to learn and master trading and investment philosophies in the right earnest. Learning a game of investing and trading in the stock market with real money is an expensive task and sometimes lethal for our financial health. Profit for a trader in a transaction simply means it is a loss for someone else. Money simply changes hands during transaction and a stock market never generates any money like a manufacturing unit who adds value during various processes. On the contrary, it takes money out from the market by way of commission and taxes associated with each transaction. With these insights, it becomes more interesting and challenging to understand the game of investing and trading using Investopedia Stock Simulator through virtual money, albeit in a real stock market settings. I have been fortunate to know and try about Investopedia Stock Simulator to learn nitty-gritty of this game of investment. The stimulator provides $100,000 as virtual money to invest or trade depending upon someone’s whim and fancy. I simply decided to divide the sum in two parts – long term investment, and short term or swing trading including day trading in the ratio of 70/30 in that order. Long Term Investment Philosophy Warren Buffet is a strong believer in compounding power of the money that is why he prefers to invest usually for a long period of time. His wisdom does not prompt him to be a frequent trader. His long term horizons are made of 20 years or so unless something critical has happened with the stock. He also believes in philosophy to remain away from the untested companies which have not proved their credentials and definite sign of succeeding in the market place. Having full faith in Buffet’s ground philosophy and believing that ‘all eggs should not be in the same basket’, I consciously decided to diversify my long term portfolio in 14-15 companies across various industry sectors. It was also kept in mind that in any case there should not be more than 2 companies in a single sector thus, reducing the company specific risk. On daily basis, market moves on technical factors but in the long run market follows fundamentals. For a long term investment strategy the wisdom lies in following fundamental factors such as growth of the company in the given sector with perennial rising profits quarter after quarter. Low debt and high cash flow generation of a company are certainly the promising criteria behind the selection of a stock. Promoter’s stake in the company is a good indication about their confidence in the company. Benjamin Graham whom Warren Buffet considered his mentor, prescribes some of the rules while picking the stock and I cannot resist mentioning here as it reaches to the core of investing. Some of them can be described as per the following. 1. Total debt of the company should be less than its book value. 2. Current ratio needs to be greater than two that ensures liquidity strength of the company. 3. Earnings growth in previous 10 years should exceed or equal at least 7 percent on annual basis. 4. A stock is ripe for investment when its P/E ratio is at less than 40 percent of the highest recorded P/E ratio in last five years. What a stupendous criterion for investment, indeed! Short Term Investment and Swing Trading through Investopedia Simulator Stock simulator’s best application is found while investing for a short term swing trading. Stocks are on constant upward and down ward move for the various technical reasons also called demand and supply factors. Fundamental factors do not play much role in short terms. Traders try to exploit the swings of the stock to make profit. It requires a sharp eye to judge the momentum and direction of the stock albeit for a short period of time. Chartists study the patterns that are formed in day-to-day movement of the stock and accordingly they make the forecast of the likely movement either upward or downward in coming hours or days. The gain or loss is tremendous because traders take the advantage of leveraging provided by the broker. MACD and EMA as Tools Moving Average Convergence Divergence (MACD) and EMA tools as provided with stock simulator are employed in making decisions for swing and daily trading. The MACD line is denoted as a difference between the 26-day exponential moving average (EMA) and 12-day EMA. A 9-day EMA of the MACD, which is known as signal line, is plotted along the MACD. When MACD rises above the signal line it is taken as a bullish signal and conversely when MACD falls below the signal line, the incident is an indication of bearish mode. Divergence indicates the end of the current trend; however, most of the times, things are not that simple. That is where the experienced trader wins over others in deciding about the appropriate timing for taking the right position to buy or sell. Traders short sell the shares with an eye to square up later when available at lesser price before closing of the market. At any given time, market is full of buyers and sellers and there is an uninterrupted flow of transactions at each moment and price. Conclusion Investopedia Stock Simulator teaches us how discipline is to be inculcated while trading in the stock market. There has never been a consensus on a single trading concept among the most successful traders even after several decades of the existence of the stock market. That is why investing in general and trading in particular in the stock market is considered an art even after invention of several scientific theories and tons of literature. Nevertheless, a handful of traders have been successful after experiencing several bouts of failures in their trading ventures because they continued to pursue their passion doggedly and took pains in perfecting the game over time. References 1. Warren Buffet-words of wisdom (2011), October 6 2011 http://warren-buffett-words-of-wisdom.com/ 2. Everything Warren Buffet (2011), October 6 2011 http://everythingwarrenbuffett.blogspot.com/2008/03/guru-focus-warren-buffetts-mentor.html 3. Moving Average Convergence Divergence – MACD (2011), October 6 2011, http://www.investopedia.com/terms/m/macd.asp#axzz1ZuGjsDn3 Read More