April 25: Stock Traders: Consider Your Sources

by David Jenyns on April 24, 2007

Those who make the most money trading stock are the same people who have the best ability to gather and interpret information. Stock trading is about prediction–making informed guesses regarding the future value of stocks purchased and basing buying and selling decisions off of those guesses.

Good decisions are not a matter of chance. Sure, during various market booms one could probably throw a dart at NYSE listings, invest in whatever the dart hit, and still sell for a profit a month later. Those days of “guaranteed winners,” however are long gone. Making profits from stock investments is a trickier proposition in today’s more questionable economy.

As a result, a premium is placed on the value of information among stock traders. Everyone wants to know about the companies in which investing might be considered, of course. However, a close look at all aspects of the business itself is really only the beginning when it comes to stock trading.

Additional information that is in high demand includes guidance regarding the overall state of the economy. This information is critical, as large scale economic disruptions tend to cause lost value in stocks of all sorts (with only a few actually gaining as a result). Large natural disasters or terrorist events can cause precipitous market drops, which impact even small-scale investors a great deal.

The overall perspective is complimented by an understanding of the market area in which the company being considered functions. For instance, if you are considering investment in a communications company specializing in cellular tower technology, you must not only be concerned with the national economy and the specifics regarding the company. You must also take a great deal of time to review the nature of the cellular industry and expert projections regarding its growth or decline.

All of this valuable information is gathered and studied. The smartest investors will find a way to see how it all fits together and will make stock trading decisions based on those assumptions. Those who do well with their research and analysis will usually find themselves prospering. Those who simply “roll the dice” or who “play hunches” will most likely suffer losses.

The value of information cannot be overstated. However, when acquiring data from which to make a decision, the savvy investor will not put his prospects of stock trading success in jeopardy by relying on biased or inaccurate information. All of the information one accumulates in order to make wise stock market decisions must be analyzed with respect to the information source and its level of accuracy.

With some mainstream sources, this can be quickly determined. Many publications and advisory services have long track records that may give an investor a good idea of the likely validity of the information. In other cases, ascertaining the likely accuracy of data can be more difficult.

One should always view assessments, projections and any other information that may help to form a stock trading decision with particular attention paid to the sources of information. One should always ask what the information source has to gain from either the sale or purchase of stock. One must always examine data for potential biases.

A report on the booming cellular tower industry might be helpful in our earlier example. However, if the report was commissioned by the U.S. Cell Tower Industry Group, it should be approached with a little more skepticism. If a new report projects U.S. economic gains, one should find out who issued it. If it comes from a Presidential advisory group in an election year, for instance, one might want to consider what possible motivations could have led to those conclusions.

Put simply, one should look for information that is likely to be accurate and that is produced by individuals who do not have a vested interest in your buying and selling decisions. Information for stock trading is critical, but data that is not objective is potentially damning if acted upon.

Objective information based on a studied assessment of economic and corporate realities is amazingly valuable to those engaged in stock trading. Successful traders recognize this information is their lifeblood and are willing to invest considerable time and resources in obtaining the best possible fact sets from which to draw conclusions.

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