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Being in the trading and investing business for over forty years - as a market-maker, a mega-bank derivative hedging and trading specialist, and a hedge fund manager - has taught me a few things about buying stocks, too many to even list on all the pages of a legal pad.
But there are really only five things that matter, five things that I've learned over all those years that have to be present for me to buy a stock. And it doesn't matter if you're buying a stock for a trade or as an investment for the long-term. The five things always apply.
What differs, mainly, is the order of importance. When you're looking at long-term investments, you have to take a more "ground up" approach and look at a company the way any Wall Street analyst or banker would.
Traders on the other hand, especially "retail" traders (which basically just means all of us), are looking for short-term gains. They're bent on trading and taking profits as opposed to tying up their capital, especially in sideways or volatile markets.
If you're trading, you have to emphasize those factors which are contributing to current price action, momentum, and movement.
But whichever side of the fence you're on, the five things you need to know remain the same.
So here's what they are and how you can apply them to help you more consistently pick winning investments and trades.
Because most people plan on buying stocks as long-term investments, the order of importance of the five things you have to have should be:
- The company must have products or services that can fill a gigantic addressable market and be the best or among the best at it... or be a disruptor on their way to changing the space.
- Revenue, profit margins, and profits - what analysts call "earnings," in sum. They matter.
- Capital structure matters a lot more than most people think, because there are critical clues to a company's prospects in its capital structure.
- Intrinsic value, which is an assessment of a company or its stock in terms of traders' and investors' perception of the company and its prospects. Narratives relating to the company, and behavioral investing factors that stem from an assessment of intrinsic value (as opposed to market value) are akin to a secret sauce that if present (or better yet, persistent) can catapult a stock.
- The picture of investor psychology manifested through price action, captured in charts, has to be corroborative.
Again, that order makes sense because it's how any Wall Street analyst or banker would look at a company and its stock, from the ground up.
But of course, not everyone buys stocks as investments. Especially in markets as volatile as these, maintaining a trader's mindset is crucial to building and keeping wealth.
In fact, my number one rule of investing is, every investment starts with a trade.
I started my career as a trader, and I'm still a trader. However, my best returns and …
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
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