Financial stocks are just like any other stocks - they are simply stocks of companies in the financial sector. These include companies in retail and commercial banking, insurance, fintech companies and brokerage firms, to mention just a few. In this article, we'll have a look at what financial stock trading involves, and share some tips on how to go about trading in financial companies online.
Naturally, it almost goes without saying that the overwhelming majority of financial stocks are bank stocks. However, there are also fintech companies (PayPal, Skrill, credit card companies etc.), insurance companies, mortgage investment companies (real estate is no longer a part of the financial sector as far as securities are concerned), and other financial services companies, including things like rating agencies and the like. Finally, all kinds of blockchain and cryptocurrency-based companies also belong in the financial sector.
The topic of financial stocks is really so vast, one could write a whole encyclopedia about it. But that doesn't necessarily mean that one needs to read a whole encyclopedia before one is ready to start trading. There is an old saying: "chance favours the prepared mind." When one performs the basic research, one puts oneself way ahead of the rest of the pack.
The first thing you will need to do is open an account (explained in detail in the following paragraph). The next thing will be to do the appropriate market research.
Starting by following sites such as Google Finance, for example, is a good initial step. Follow price charts, then follow them some more. Study the financial spreadsheets of companies you are interested in going long or short on. Make sure to look at all different kinds of timeframes, and to not get stuck on just one or two.
One never knows how many people haven't taken the obvious first step and opened an account so that they can have access to the markets they want to trade in. There are many ways to do this, but the best thing to do is to have a proper professional trading account as well as a personal one.
Often, the bank you already do business with can help you set up the latter, or in some cases, you already have a brokerage account with your checking account.
These days, there is also the option of going for a reputable online broker that will give you access to a wide variety of stock trading options. It's also a good idea to read reviews before taking on a broker.
It is highly recommended that you start off with virtual trading, meaning you are not playing "for keeps". This will give you a feel for the way things work when trading financial stocks without having to risk actual money. Most online brokers will allow you to open a demo account in order to do this.
Eventually, the big transition to putting real money on the line will have to be made, but take your time and get to know how financial stocks perform. This means that even if you've already traded other stocks, you'll need to get used to financials.
Financial stocks are very technical in nature, and one needs a thorough technical analysis to make informed trading decisions, more than for any other kind of stock. One key statistic people tend to gloss over with bank stocks, for example, is the efficiency ratio. That is to say, how much a bank needs to spend for every dollar it makes. With bank stocks especially, one needs to be careful not to buy something that is already overvalued.
You can trade financial stocks by opening a BUY (long) position. This means that the stock will be purchased in your name.
Leverage, or trading on a margin, means that you have access to more than your own capital, allowing you to invest in more stock than you normally would. This can allow you to capitalise on a good strategy, but of course, the trade-off is the increased risk involved, and the (most probably) interest and fees involved when using leverage. Surprisingly for many, some experts think that financial stock trading is a great marriage with leverage because this allows for profit on lesser movements during the invariable stagnant periods many financial stocks enter into.
There is no point in repeating the obvious tropes of "buy low, sell high" etc. here. What is much more germane in this article is to give you specific advice on how to profit from financial stocks specifically.
The fintech sector is a very powerful subset of financial stocks in general, and should be watched closely, as it has a lot of potential for growth. However, having said that, financial stocks are generally best viewed as long-term instruments, and often the old adage to "stay invested" is, in fact, a truism on many occasions.
It's important to consider that financial stocks are often very cyclical, often in more than one time-frame. Values can cycle based even on what time of year it is, for example. Try to identify as many of these cycles as you possibly can for every stock you follow, and use them to identify dips that are good opportunities to invest further, for example. It's surprising how many cyclical trends exist that low-level traders hardly take notice of, if at all. Get the big picture and trade like a master!
This is what separates the experts from the hobbyists when it comes to true trading. Research, as we have previously already mentioned, is very key here. Financial stocks often see very little volatility, and then all of a sudden they are all over the place. In the long term, of course, they are among the most stable securities out there. But things such as interest rates, acts of legislative or regulatory bodies, or movements in the currency markets can create temporary peaks/dips that the savvy trader will be aware of before they happen.
To sum up what we've said so far, we've looked at leverage trading, identifying cycles, and staying in financial stocks for the long term for maximum benefit. The good news is that these strategies are combinable, fungible and to a good degree, interchangeable. The one thing that it's very important to mention is that it's imperative that every trader find his or her own rhythm/style, in accordance with their personalities. You need to not only do your own research; you have to make decisions as to what works best for you.
This is why so many people end up dropping out of trading before their first year is up. This bears special mentioning in this article because it's so common, with financial stocks in particular, for people to just follow the crowd, follow one or two of their favourite "gurus", or chase dubious "hot tips" and fritter their resources away in that manner.
One key element is that will help you with financial stocks trading is learning when to go long or short.
We must remember that financial stocks, as we've said before, are usually long term in nature. Thus, shorting financial stocks is something the savvy trader wants to do in the short-term. A good example would be when a popular measure is enacted by the government, but the wise trader knows that this measure will eventually be bad for banking. He or she waits for where the most likely peak is and then shorts. Once the market has caught up with the effects of the legislation, the trader goes back in.
Stops and limits are also very important, especially when pursuing strategies as described above. There is one big reason why stops and limits are of so important. They help you to act in a calm and logical manner. It's no big secret that one of the biggest trading errors is letting your emotions take over. Tools such as stops and limits help avoid this and promote sticking with the original plan, which was made with a cooler head, and is much more likely to succeed than any kind of impulsive changing horses in mid-stream.
Risks in trading financial stocks can actually be a lot less than risks in trading other categories of stocks. This is because the financial industry itself is so largely computational in many ways. By this, it is meant that things tend to run in a lot of cases by the numbers, and, while things can get quite complex, there is a good chance of successfully predicting them. This is, of course, assuming that you, as a smart trader, have been paying attention. Once again, we are back to "chance favours the prepared mind."
Financial stocks are a key part of just about every professional trader's portfolio. While it should be observed that the best traders have a very broad knowledge base and trade all sorts of stocks and other securities, financial stocks are often at the backbone of some of the best financial empires the world has ever seen. It is our hope that, after having read this article, you will feel more confident to take the plunge into financial stocks.