If we had to sum up what trading service stocks is like in one word, we'd have to say "exciting"! Service stocks, or consumer service stocks, as they are sometimes called, have some of the largest market volatility out there. They also tend to be among the stocks that are prone to seemingly "unpredictable" reversals. But the reality is, there is nothing in this world that's completely unpredictable. Let's look at how to trade service stocks with authority, like a pro.
Or perhaps a better question would be: "Why should I trade in service stocks as opposed to other stocks?" It has been stated, wisely in our opinion, that your own style of investing and trading should come from you and no other; that one person's strategy is another's doom. This is as true as ever. One could ask oneself "would services stocks be right for me?", and many times that answer is going to be "yes"... but your success hugely depends on your ability to foresee certain trends in time.
Because service stocks are among the volatile stocks, generally one wants to diversify as much as possible, as opposed to putting all one's eggs in one basket, so to speak. There are many ways to diversify, but one of our favourites is to pick a particular sector of the service market and micro-diversify in that area. Go long on all of them, perhaps weighting them a bit in favour of your favourites, the companies that one thinks are going to dominate. In this way, one is focused and diversified at the same time.
You may already have a brokerage account with your bank, especially if you bank with someone like Schwab. However, if you really want to get into trading as a way of life, you need a proper broker. The right broker is absolutely worth the commissions charged, many times over. Of course, it's super important to make sure you get in with a brokerage firm that has goals and a culture that click with you as an individual, corollary to the above.
Don't be afraid to look around a bit to find the right fit - today there are several reputable online brokers that give you access to a variety of stocks in different markets and listed under different exchanges.
If you Google service stocks, you are going to get a list of scores and scores of "hot" picks from industry "experts". It goes without saying that if trading were that easy, nobody would need to be writing this article!
As opposed to, say, financial stocks, with service stocks there is a lot more movement, speaking relatively. Of course, all stocks can go volatile from time to time, but it's more the order of the day for service stocks, and the swings are also generally much bigger. Trading service stocks is taming the tiger!
For the capable trader, services stocks present a lot more opportunities to make money off of all that volatility. The trick is to learn to predict movements. While it's true that even the most experienced trader can get caught by unexpected movements, and it happens to the best of us, it's also true that stock market movements always have some cause behind them!
Predicting trends is what separates the hordes of would-be traders who burn out in a year or less and the real traders who make their fortune.
In a previous article, we talked about how great leverage is when combined with financial stocks. This isn't quite as true for service stocks, because it's not necessary to "manufacture" so much volatility by leveraging when the market generally already has it built-in. Having said that, there are certain situations where leveraging is indicated with more volatile stocks. As the illustrious Warren Buffet once put it, leveraging is perfect for "turning a good portfolio into a great one". What that means is, if you see your portfolio doing what it's supposed to, leverage!
We've talked a lot about how volatile service industry stocks can be in this article, but that doesn't necessarily mean that they are risky in the long term, especially if they are mid to high cap. In fact, as with stocks in many other industry sectors, service stocks tend to soar in the long term. Often even a long-standing service stock soars from one year to the next, if circumstances are favourable. An obvious recent example of this is Pfizer. Some not so obvious examples would be UPS and FedEx.
Let's expand on those previous examples. Suppose we are all analysing market trends a year ago. The savvy traders of this world would have been taking notes furiously and running scenarios as this new and scary virus was shutting down parts of China. The smart money would have been on the pandemic going worldwide, and the many implications that would have had on service stocks. This meant going long on companies such as Google and Amazon, Pfizer, Moderna, perhaps throwing something in the e-learning sector in there for a bit of high-risk high-reward "spice".
So what moved the prices this year? How "predictable" was it? Of course, in 2021 it's easy to make predictions for 2020 with all of the benefit of hindsight that we now have. But there were people who bought the appropriate stocks a full year ago, kicked back and watched their portfolio go into "warp speed" (if you get the analogy)? This is what the good trader learns to do, in some way. Remember that diversification is key; people who invested in Pfizer, Moderna, Covax and several others are all very happy now!
As far as service stocks go, their nature makes them very flexible vis a vis individual investment plans and strategy. This may be, in fact, their biggest strength. The trader, when working with service stocks, has the option of ignoring the "bumps in the road" and adopting a passive strategy, or going more aggressive and trying to take advantage of the volatility in an active way. And, naturally, this isn't a binary switch; it's a continuum, so you can find your perfect little sweet spot for you anywhere along this big continuum.
It's important to remember that there are more aggressive and more passive ways to use leverage as well. The proper subtle use of leverage can really fine-tune a portfolio in these types of cases. Leverage itself is actually very much a continuum as well; in fact, it's a multidimensional series of continua, technically speaking. It is important to analyse these parameters with a clear head, and constantly be looking at data and running scenarios.
By the same token, the authoritative trader always looks for opportunities to go long as well as short. Service stocks are often great for this, as they frequently experience temporary dips. Each one of these is a golden opportunity for those who are paying attention. Right now, vaccination programs are rolling out all over the world. Will the vaccine be safe and effective? It probably will, so what are the market implications of that? Also, what industries have just experienced that big run-up due to recent events and are due for a correction?
This is a fairly standard warning for any kind of trading, really. Know your limits. Set your stops at that moment you initially take a position. Don't alter that, unless it's under the most extreme circumstances. It's impossible to trade with authority unless you have proper discipline when it comes to dealing with the market. It's extremely important that new traders develop good habits right from the get-go. The benefits of using stops and limits far, far outweigh the downsides of the same. Trust us on this; you will be glad you did!
The common uninformed wannabe trader tends to think the biggest risk, that of one losing everything on a position, is also the most common risk. The fact is, if you invest in Amazon or FedEx, the chances of the stock going to zero are pretty slim, almost no matter what happens. The common risk that one should watch out for is simply that of catching the hype train at too late a date and winding up buying a bunch of super overvalued stock. Then that first correction really can and does decimate you.
Service stock trading is among the most satisfying ways to play the market, because it is chock full of possibilities. As was mentioned before, service stocks are super flexible and allow for a very wide variety of trading strategies to be employed when dealing with them. They are for many traders a happy medium between excitement and long-term stability, having the former without sacrificing too much of the latter. If this appeals to you as a trader, you are probably a great candidate for having lots of these service industry stocks in your portfolio!