Do Retail Traders Have Any Idea What They're Doing?

Do retail traders know what they're doing? Historically, mom and pop investors simply placed their money in companies they believed were trustworthy. In fact, this simple method of investing was championed by Warren Buffett, who claimed that he only invested in businesses that he understood.

In this day and age, traders have to be extremely quick and versatile, placing both short-term and long-term trades in order to be profitable. Whether traders bet on earnings, rumors, or other important announcements, short-term and speculative trading is starting to take over the equity markets. What are retail traders to do?

Equities are one of the most commonly traded financial instruments among retail traders, tracking two particular types of assets: companies and exchange traded funds (ETFs). ETFs are pools of cash and assets used to track indices or other phenomena; for example, there are ETFs that track emerging markets and there are some that track US 10 Year Treasury Bonds.

Equities are the most vulnerable to news in general, being affected by company-specific and macroeconomic news. If a company issues poor earnings for its latest quarter, it will adversely affect that company's stock. Likewise, if the company happened to be a sector stalwart, such as Apple in the information technology sector, many other equities in the same space will probably be negatively affected, especially if they have no significant news of their own to trade off of.

On the same token, positive political news or positive foreign developments could prompt rallying in the equity markets, as investors may feel more confident in parking their money in relatively risky equity securities. As expected, commodity news, fixed income developments, and foreign exchange updates could move equities if they are significant enough.

Investors need to be able to figure out which news updates are critical to their equity goals. Company-specific news like earnings announcements, earnings guidances, mergers and acquisitions, financing opportunities, and lucrative contracts can all push a specific equity up or down. As mentioned before, if a company is large and influential, such as those tracked by the Dow Jones Industrial Average, significant news for that company could affect others in its sector.

Other news like economic numbers can move overall economic markets, bringing any particular equity up or down if it lacks its own news. Similarly, commodities like crude oil could move oil companies like Chevron CVX or Exxon-Mobil XOM. If the Euro is trading poorly, as a result of negative European data, European companies like Deutsche Bank DB or BP BP could trade downward as well.

Investors need to be careful with equities, considering the large array of data available. Ultimately, it takes experience to understand how each piece of news will affect any particular stock in one's portfolio. However, knowing what news items are pertinent to equities is a positive, and profitable, head start.