5 Must-Haves for Turning Stock Volatility into Profits

The basic concept of stocks is that when you buy, you are supposed to hold them for a long time with the anticipation that you will receive dividends at the end of each financial year. However, receiving dividends is not the only way you earn from stocks.

The other way you can earn from stocks is to sell them at a higher price than what you bought them. Indeed, much of the money made in the financial markets comes from profits made buying and selling stocks. This is what is known as day trading stocks.

Buy low, or short the market.

In addition to buying stocks when prices are low prices to sell after they've risen, you can also sell stocks that you already acquired in the anticipation that the price is going down, and you repurchase them when the price has hit bottom.

This is called shorting the market, and often it involves borrowing other people's stocks for this purpose. After you buy them back at a lower price, you returned them to the owners and keep the profit you made.

Before you think this is an easy way to make quick money, you should know that the stock markets are generally very unpredictable. While you stand to make huge profits, you may lose everything when the market doesn't behave in the way you expect it.

To increase your chances of making profits and decrease your chances of making losses, you should acquire the following five things:

1. Comprehensive understanding of day trading

You should take the time to learn and understand how day trading works. Fortunately, you can get detailed and comprehensive day trading guides online. You may also consider enrolling in courses that are offered by those who have experience in day trading.

Another source of knowledge about day trading is forums where those who have grown in the trade come to share their experience and strategies. These forums are both online and in the real world. Online forums include social networking groups and webinars. The offline forums include meetups and conferences.

2. Tools to help you create strategies

In the years that have gone by, if you needed to leverage on stock volatility to make profits, you had to learn how to manually calculate and measure the underlying trends so as develop your strategies. You also needed to identify and develop your own good sources of the data you need for this purpose.

Fortunately, that is no longer the case. Very powerful tools that have been developed to do much of the work for you. These tools have access to numerous and well-connected oracles that feed them with high-quality data from the markets. They also have algorithms that process that data to give you the information you need to decide whether to buy or sell a stock.

You must invest in one of those tools. Even more important, you need to learn how to use the information they provide you to make the right decisions.

3. Brokerage account

It is a brokerage firm that gives you access to a market. Besides, it processes transactions on your behalf. Often you have a long list to choose from depending on which part of the world you reside in or the markets you are interested in.

Most of them facilitate you accessing markets remotely. Nevertheless, you must pick a firm that gives you access to the kind of market that interests you and provides the type of features you need.

For example, if you are based in Europe and want to trade penny stocks in the US, you need a brokerage firm that allows you to transact from Europe. You may also need support margin trading.

4. General Knowledge of your target industries

When buying stocks to hold for dividends, you must do thorough research on the company, and more importantly, the industry in which it operates. It might seem like this is unnecessary when you are buying to hold for a day or two.

Even in day trading, putting money in stocks whose companies operate in an industry you don't understand is highly risky. Through thorough research of the industry, you can predict market movements and trends way before they happen, giving you the advantage to make the right investment decisions.

5. A capital amount

Last but not least, you need capital. It should be an amount you can afford to lose when the market moves in the direction you are not hoping for. It is also important that you start small and then increase it as you gain experience, skills, and confidence.

As mentioned, some brokerage firms can give you access to a credit facility known as margin trading. That means you get a loan based on what you've deposited with them. It is highly risky to use this facility because the firm liquidates your strategy threatens their money.

Day trading is a lucrative undertaking, but only if you have the necessary knowledge, skill, and tools.