A few questions to ask before trading

A few questions to ask before tradingActive investors in contrast to passive ivnestors believe that they can beat the market. To beat the market without accepting more risk is possible only if you posses information that are not known on the market. It must be information that only you or a small group of investors are aware of. As a result, all active investors or traders should ask themselves these questions before trading:

  1. Why wouldn’t this information already be embedded in the price?
  2. Is this an inside information or is it an information that is well known to all investors?
  3. Is there a convincing reason to assume that current price is not fair?

In my opinion, the vast majority of news investors trade on is publicly known information (earnings forecast, revenues forecast, expected resignation of a CEO, past prices when it comes to technical analysis etc.) that is as a matter of fact already incorporated in the prices of investment vehicles, e.g. stocks. Therefore, there is no convincing reason to assume that current prices are not fair.

If you are buying stocks of a certain company to speculate on any information how can you be sure that the guy selling the stock to you does not have better information? If he is selling why are you buying? If the guy selling the stocks is an experienced investor or a mutual fund manager, are you really sure that you posses more valuable information than these highly educated people?

Via IFA Blog.

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