TRADE ADVISOR: Buying Hot Stocks Is Not the Way to Go
Professional investors can be differentiated from amateurs just by talking to them. For instance, “If a company is hot, you’ll definitely see great returns by investing in it,” is a very common misconception a seasoned investor would think twice to say out loud.
There’s not a single reason for this, but for starters, the most obvious is that no investment is a sure thing. No matter how big a company is, how much track record it has, or even if it’s currently enjoying a long bull run, any company can be struck by disaster, like a major change in the market place, or hide significant problems from shareholders.
You have companies like Nokia, a leading mobile-phone maker that fell out of step with its market — and still hasn’t managed to catch up. Let’s not forget BP, struck by an environmental disaster that led to atrocious PR. Or Enron, which imploded during its best moment due to management miscommunication and lack of openness regarding its problems.
And one of the biggest examples of this occurrence: Blockbuster, the video-rental chain that was not only wildly successful, but had also endured a previous market transition from VHS to DVD just fine—then failed to adjust to the next big change.
So, you see, a hot stock does not necessarily a safe stock make. And there’s another reason to reject the misconception of expecting great ROI from hot companies: overvalue.
What is overvalue? Well, this is an economics phenomenon that occurs when a stock has a current price that is not backed by its earnings expectations, as detailed on its profit projections, or price-earnings (P/E) ratio. This overvaluation commonly comes from a small increase in emotional trading, or gut-driven investing that causes the stock’s market price to inflate. As you can see, this is something that can happen very easily with a company perceived as untouchable.
This will invariably lead to buying at an unreasonably high price that will make it harder to get a good return.
Of course, you always have the option to short the stocks – which basically means selling at the overvalued price to repurchase later when it falls back in line with the market – and at first glance that looks like sound option, right?
Aren’t you forgetting the first reason? You can never know if it will truly fall back in line with the market and allow you to short. Hot stocks, just like hot markets, are susceptible to bubbles, and yes, bubbles can be profitable if you know exactly when to withdraw. But no investor makes profit out of a bubble once they’re hot.
They get in early, when they see the potential, they stay for the growth and then liquidate before any bubble has burst.
If you invest in a stock that’s overvalued just because it’s hot and it turns out to be a bubble, you risk losing capital. Or if you sell them with the intention of shorting and in the end, you buy back, all you have is your same money back and no ROI.
If you, as a potential investor, strive to avoid overpaying for stocks and protect yourself from disaster, the focus you need to have is: diversify your investments.
This is something that can be achieved with relative ease if you invest in already-diversified mutual funds. But if, instead, you plan to invest in individual stocks, to increase your chances of returns and also reduce the investing risk rate, ditch the eye for glamour and start appreciating potential.
Already-stablished companies, by definition, have tapped most of their potential for growth. And unless they’re doing an expansion-oriented financing round, they offer less in returns than emergent companies or startups. And even then, the growth is never assured. Remember that no market will ever grow limitless.
Any experienced investor learns this over time, the biggest potential for returns is commonly found within relatively new markets that have high reach, with a big target market and under which a disruptiveness trend has allowed the appearance of new players.
One of these markets is the FinTech sector, or Financial Technologies market, which has had a lot of buzz lately given the new tech that has been created out of this sector. Blockchain technology is one of them and no one can deny that it’s changing the world exponentially, in and out of the financial sector.
It’s slowly becoming the next best thing. And what started as an experiment has quickly spiraled out as different applications of Blockchain have been forked, reworked, and issued out in many ways.
Now, outside of investing and currency exchange, Blockchain technology is being used in record keeping, entertainment, large banking companies and even logistic-centered projects are getting in on the action and using it in creative ways.
Within the FinTech sector, a revolution is taking place: payments, investing, venture capital, remittance services, and trading are changing.
One company from this disruptive, groundbreaking and emergent market seems to have it all, Konzortia Capital, a holding of a Consortium of FinTech companies.
They´re creating a new asset class that´s very similar to publicly traded stocks as it is a liquid instrument, but it’s also backed by real assets; the equity of that very same holding company. But not only that, this new asset class comes with its own truly global stock market that will allow any investor around the world to virtually trade any existing liquid asset. They’re calling it the NAO index and we know you’re going to want to know more.
They’re still on their private sale phase and they’re operating in one of the most innovative emergent markets of late, which means they have tons of potential for growth.
This is the type of opportunity with long-term value that can actually generate amazing returns and now you have the chance to participate at their ground-floor level with very special advantages and preferences.
To check out the incredible ideas this company is bringing to life, and the one-in-a-lifetime shot at greatly profiting by becoming a part of the future of finance, you’re going to want to follow the link below.