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How to Be the Perfect Copycat Investor
by Elvis Picardo
Copycat investing, as the name implies, refers to the strategy of replicating the investment ideas of famous investors or investment managers. The strategy is also known as coattail investing since the investor rides on the coattails of those who presumably have much more investment prowess.
But is copycat investing a viable trading or investment strategy? While the evidence about its success is somewhat mixed, there are certain techniques you can use to increase your chances of becoming the perfect copycat investor.
Buffett Bootleg vs. Miller Mime
The long-term success of legendary investor Warren Buffett has attracted a host of copycats over the years, and that could be because replicating Buffett’s strategy has made people money.
According to a 2008 study by Gerald Martin and John Puthenpurackal, a hypothetical portfolio that mimicked Berkshire Hathaway’s investments a month after they were publicly disclosed would have outperformed the S&P 500 by an annual average of 10.75% from 1976 to 2006.1
But before you rush off to check Buffett’s current holdings, consider the other side of the coin, when a long streak of outperformance ends with a resounding thud. Fund manager Bill Miller joined the pantheon of great investment managers after his Legg Mason Value Trust Fund beat the S&P 500 for 15 years in a row, from 1991 to 2006.2 Miller’s fund finally had a bad year in 2007—losing 6.6% and trailing the S&P 500.
However, 2008 was an outright disaster for the Value Trust, which plummeted 55%, compared with a 37% plunge for the S&P 500, as Miller loaded up on flameouts like Bear Stearns and AIG.
Investors who had mimicked Miller would have rued their decision if they had continued to do so after 2006. Miller eventually opted to step down from managing the Value Trust Fund in 2012.3
How to Be a Copycat
Copycat investing is more widespread than one would think, although it is often done discreetly and without much fanfare by institutional investors like mutual funds and hedge funds. But the idea of latching onto someone else’s investing ideas has also caught on among retail investors.
The earliest copycat investors would routinely scour regulatory filings from mutual fund companies to discover which stocks star managers had loaded up on in recent months. Nowadays, online value investing research companies such as GuruFocus offer an alternative to this arduous process by tracking and displaying the holdings of the best investors and investment managers.
Then there’s “mirror investing,” which copies the copycat strategy and takes it one step further. Services such as TD Ameritrade’s Autotrade enable an investor to link investment accounts to portfolios actively managed by other investors or investment professionals and automatically mirror every investment move that the latter make, within specific allocations set by the investor.
The obvious difference between copycat investing and mirror investing is that the former attempts to duplicate trading ideas only of well-known and recognized investment gurus.
Who Should You Copy?
Investors considering a copycat strategy should consider replicating investment ideas from the following sources.
Successful Money Managers
All institutional money managers with over $100 million in qualifying assets are required to file SEC Form 13F quarterly detailing their investment holdings.4 This is a great source document for copycat trades.
Buy-and-Hold Managers
Copycat investors would be much better served by getting ideas from long-term managers who believe in buy-and-hold, rather than investment pros who are short-term traders. This is because the time lag between an actual trade and its reporting may be a detriment to effective trade replication.
It’s better to go with someone like Buffett, who has often been quoted as saying, “Our favorite holding period is forever.â€5
Activist Investors
Activist investors like Carl Icahn can usually cause a stock to appreciate as soon as the news of their involvement in the company becomes public.6 Icahn often shares his investment plans on X (formerly Twitter), which makes it easier for copycat investors to act on them rather than waiting for regulatory filings.
What Are the Risks?
Like any other strategy, copycat investing has its share of risks.
Success Is Not Guaranteed
No investment strategy is a sure-shot winner. For example, a copycat investor may have to stick with the strategy for many years if following a value-based manager since value stocks sometimes take an eternity to turn around.
Losing patience and abandoning the strategy prematurely may result in substantial losses.
Stock May Have Already Moved
A stock may have already moved significantly between the time it was acquired (or disposed of) by a money manager and the time this news is made public. This has an adverse effect on the stock’s risk-reward profile for the copycat investor.
Too Many Copycats
Too many investors—retail and institutional—are watching the top hedge funds and money managers. Given the speed of information dissemination and trading nowadays, an investor who is a little late to a copycat trade is at a huge disadvantage, because the stock may have already moved quite a bit in a short time span.
Differing Investment Objectives
Your investment horizon and objectives may differ from that of the money manager. For example, you may have a very short-term horizon, while the manager you are copying may be in for the long haul. Or the money manager may have a risk tolerance level that is much higher than your own.
How Should You Do It?
Here are some suggestions to consider while implementing a copycat investment strategy.
Follow Credible, Successful Professionals
Stick with the tried-and-tested money managers, since you may occasionally come across a stock that could be a spectacular success. As an example, Carl Icahn sold close to 3 million shares of Netflix (NFLX) in October 2013, after the stock had more than tripled that year.
Icahn’s average cost of the Netflix stake was $58 when he originally acquired the shares on Oct. 31, 2012. A year later, the shares were sold around $323 for a gain of 457%. Copying a timely investment like that could juice up returns for any investor’s portfolio.
Exercise Patience
Chasing a stock is never a good idea. If a stock has already moved up on news that an investing heavyweight has taken a position in it, the best course of action may be to wait for it to come back within your buying range. If it does not, move on to something else.
Look for Accumulation
Large-capitalization stocks that are having hard times may be a great opportunity for patient investors. Look for such stocks where money managers have commenced accumulating significant positions since this signals their confidence in a turnaround in the near- to medium-term.
Follow Pros in Different Sectors
Don’t put all your eggs in one basket by focusing only on investment professionals in one or two sectors. Many top managers and investors in a specific sector have a considerable degree of overlap in their holdings. Diversify your copycat strategy by replicating investment ideas from gurus in different sectors.
Conduct Your Own Due Diligence
Do not assume that copying trades from the best money managers around absolves you of the responsibility to conduct your own due diligence. Ensure that copycat stock you are considering is suitable for your investment objectives and risk tolerance before you acquire it.
Who Are the Best Investors to Copycat?
If you’re going to use a copycat investing strategy, the best investors to imitate are ones with a proven track record of success, such as top mutual fund managers and well-known investors. You can also use a company’s public filings to find out more about shares bought and sold by corporate insiders and significant shareholders.
Does Copycat Investing Work?
Copycat investing can work, and it’s a great way to learn from top investors. But keep in mind that these investors, such as Warren Buffet, are working at a much greater scale, which allows them to diversify their holdings in a way that’s difficult for retail traders to emulate.
Which Investing Apps Can Do Copycat Investing?
Investing apps can help you copy others’ investments. For example, you can use eToro’s Copy Trader platform to automatically copy trades in real time.7 There are also investing research platforms like Guru Focus, which can help you identify the trades that big investors are making. You can then use nearly any investing app to place your trades.
The Bottom Line
While copycat investing has its risks, common-sense measures—such as following successful investors, exercising patience, looking for accumulation, diversifying with different sectors and conducting your own due diligence—can help you become a (near) perfect copycat and improve your chances of investment success.
Unlocking Investment Success: The Power of a Mentor
by Jack Laffan
Today, I’m going to show you the transformative power of having a guide or mentor in your investing journey. Just like navigating a complex trail requires a seasoned guide, navigating the stock market requires the insights and wisdom of a mentor. The right mentor can offer you a roadmap to success, helping you avoid common pitfalls and accelerate your learning curve.
Unfortunately, many aspiring investors embark on this journey alone. The complex world of investing, brimming with jargon and intricate strategies, can be daunting for newcomers and seasoned investors alike.
Many believe they can go it alone, underestimating the value a mentor can bring.
Other reasons include:
- Overconfidence in one’s ability to navigate the market without guidance. Â
- The perception that finding a mentor is too difficult or costly. Â
- A lack of understanding of how a mentor can provide personalized insights. Â
- The belief that online resources and tools are sufficient.
But here’s the good news: overcoming these obstacles is not only possible, but it can also be incredibly rewarding.
Here’s how, step by step:
Step 1: Recognize the value of mentorship in investing.
It’s crucial to understand that investing is not just about numbers and charts; it’s about making informed decisions under uncertainty. Reflecting on my own experience, having a mentor was like having a lighthouse guiding me through a stormy sea. A mentor’s experience can illuminate your path, helping you navigate through complex decisions with greater confidence. Warren Buffett, one of the most successful investors of all time, had Benjamin Graham as a mentor. Buffett once said, “The best investment you can make is in yourself.” And what better way to invest in yourself than by seeking the guidance of a mentor?
Step 2: Find the right mentor who aligns with your investing goals and style.
This is where many go wrong by either choosing the wrong mentor or not actively seeking one at all. Think about what you want to achieve and your preferred investing style, then look for a mentor who has walked that path successfully. My journey in surf lifesaving taught me the importance of having a capable and experienced mentor. Just as my surf lifesaving trainer tailored our training to each individual’s strengths and weaknesses, your investment mentor should provide personalized guidance that caters to your unique financial goals and risk tolerance.
Step 3: Be open to learning and evolving your investment strategy based on mentorship.
The final step is to embrace the wisdom your mentor shares with you. This doesn’t mean following their advice blindly, but rather integrating their insights with your own research and analysis. My experience on the farm, where I learned from my family the value of hard work and adaptability, showed me that success comes from listening, learning, and applying those lessons to your own context. Your mentor’s experiences, both their successes and failures, are a treasure trove of knowledge. By being receptive and adaptable, you can avoid common pitfalls and refine your investment strategy for better outcomes.
By acknowledging the value of a mentor, seeking the right guide, and integrating their wisdom into your investment approach, you’re setting yourself up for a more informed and potentially more successful investing journey.
Remember, the path to investment success is not a solo expedition but a journey enriched by the experiences and guidance of those who have navigated it before you.
The power of mentorship to accelerate your investment career
by Yolanda Beattie
Despite growing efforts to address the gender imbalance across investment management, breaking into this traditionally male-dominated field can be challenging for women. Whether it’s a need for more awareness about the industry or a lack of confidence in their abilities, women apply for and secure far fewer investing roles than their male peers. With investment teams also small with low turnover, competition for roles is intense, and opportunities often arise through existing relationships, that is, “who you knowâ€.
So, how can women get a leg up in this industry? Find yourself a mentor!
Why mentorship matters
Mentorship can be a game-changer if you aspire to a career in investment management. Mentors offer guidance and support, drawing from their own experiences to help you understand the industry, define your career goals and navigate challenges. They can open doors to networking opportunities, connecting you with industry insiders and potential job prospects. Mentors can also provide feedback on any skills gaps and help you develop essential capabilities like financial analysis and effective communication, boosting your confidence and resilience along the way.
Finding a mentor
When seeking a mentor, consider people in your existing network that you admire and respect or professional investors you have met or were inspired by at networking events. Be brave and contact them on LinkedIn to express your interest in a meeting and potential mentoring relationship. Highlight your goals and aspirations, and pique their interest with an interesting investing idea, left-field stock pick or investment thesis you’d like to discuss.
Getting the most out of mentorship
When embarking on a mentoring relationship, start with getting to know each other, sharing your experiences and building rapport. Clearly define your goals and expectations upfront, and make a solid commitment to each other to show up, come prepared, and follow through. Being receptive to feedback and maintaining open communication is critical to fostering a positive and collaborative relationship. And remember, mentorship is a two-way street, mentors get as much out of these relationships as mentees.
The Canvas Of Wealth: Navigating The Evolving Landscape Of Art Investment In 2024
By
In an era of economic uncertainty and market volatility, high-net-worth individuals (HNWIs) are increasingly turning their attention to alternative investments. Among these, the art market stands out as a compelling option, offering not just potential financial returns but also the allure of owning pieces of cultural significance. However, as we delve into 2024, the landscape of art investment is undergoing significant shifts, presenting both challenges and opportunities for savvy investors.
The State of the Market: A Delicate Balance
According to the latest UBS and Art Basel Art Market Report, the global art market experienced a slight contraction in 2023, with sales dipping 4% year-on-year to an estimated $65 billion. This decline, following two years of growth, reflects the impact of high interest rates, inflation, and political instability on the market. Yet, it’s crucial to note that despite this downturn, the market remains resilient, with values still above the pre-pandemic level of $64.4 billion in 2019.
Interestingly, while overall value decreased, the volume of transactions increased by 4% to 39.4 million in 2023. This trend suggests a shift in market dynamics, with more activity at lower price points and a pullback in the high-end segment. For investors, this presents a nuanced picture: while blockbuster sales may be less frequent, there’s increased liquidity and opportunity in the broader market.
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Geographic Shifts: New Centers of Gravity
The art market’s geographic landscape is evolving, offering new avenues for diversification. While the United States maintains its position as the global leader, accounting for 42% of the market by value, its dominance showed signs of weakening with a 3% year-on-year decline.
China, including Mainland China and Hong Kong, has emerged as a formidable player, increasing its market share to 19% and growing by 9% to an estimated $12.2 billion in 2023. This shift is particularly noteworthy for investors looking to diversify their art portfolios geographically.
The United Kingdom, traditionally a strong player, fell to third place with a 17% market share, while France maintained its fourth position with a 7% share. These changes in the global art landscape underscore the importance of a geographically diversified approach to art investment.
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The Digital Revolution: Online Sales and NFTs
One of the most significant trends reshaping the art investment landscape is the continued growth of online sales. Despite the overall market downturn, online sales increased by 7% to an estimated $11.8 billion in 2023. This figure, while down from the peak of $13.3 billion in 2021, remains almost double the pre-pandemic level and now accounts for 18% of the market’s total turnover.
The online market presents unique opportunities for investors, particularly in the lower to mid-price ranges. Data from the fine art auction sector in 2023 showed that 58% of the value in online-only auctions came from sales under $50,000, with over 85% from works sold for less than $250,000. This trend suggests that online platforms are democratizing art investments, allowing for more diverse portfolio-building strategies.
However, the NFT (non-fungible token) market, which captured significant attention in recent years, has shown signs of cooling. Sales of art-related NFTs on platforms outside the traditional art market declined for the second consecutive year, reaching $1.2 billion in 2023 – a 51% year-on-year drop. While this figure still represents a market 60 times larger than in 2020, it indicates that the NFT space remains volatile and requires cautious consideration from investors.
Emerging Trends: Prints, Multiples, and Market Bifurcation
Looking ahead, several trends are shaping the art investment landscape in 2024 and beyond. The prints and multiples market is set for continued growth, building on its impressive 18% increase in sales from 2023. This segment offers accessibility and affordability, potentially attracting a broader range of collectors and investors.
Another notable trend is the growing divide between established and emerging segments of the market. According to MyArtBroker, blue-chip artists and the secondary market are poised for continued strength and stability, while the primary market, art fairs, and ultra-contemporary artists face an uncertain future. This bifurcation presents both opportunities and risks for investors, depending on their risk appetite and investment goals.
Investment Strategies for the Discerning Collector
Given the complex and evolving nature of the art market, HNWIs should consider the following strategies when approaching art investment:
1. Diversification is Key: The divergent performance of different geographic markets and market segments underscores the importance of a diversified art portfolio. Consider balancing investments across regions, mediums, and price points.
2. Focus on Quality and Provenance: With a contraction in the high-end market, there may be opportunities to acquire blue-chip artworks at more favorable prices. However, thorough due diligence and expert advice remain crucial. Focus on works with strong provenance and established market histories.
3. Embrace Digital Platforms: The continued growth of online sales presents opportunities for acquiring art at various price points. Platforms like Artsy, Saatchi Art, and Artfinder offer access to a wide range of artworks and can be particularly useful for building a diverse collection or for those new to art investing.
4. Consider Fractional Ownership: As the market for high-end artworks becomes more challenging, explore opportunities in fractional ownership platforms. Companies like Masterworks allow investors to buy shares in high-value artworks, providing access to blue-chip pieces at lower entry points.
5. Stay Informed and Attend Key Events: Keep abreast of market trends, emerging artists, and technological developments in the art world. Attend major art fairs like Art Basel, Frieze Art Fair, and The Armory Show to discover new talent and stay connected with the pulse of the market.
6. Explore Alternative Investment Platforms: Platforms like Yieldstreet offer asset-backed art investments, providing alternative ways to gain exposure to the art market without direct ownership of artworks.
7. Be Cautious with NFTs:While the NFT market remains significant, its volatility requires a cautious approach. Consider allocating only a small portion of your art investment portfolio to this segment, if at all.
8. Seek Expert Advice: Given the complexities of the current market, working with reputable art advisors, gallerists, and auction houses is more important than ever to make informed investment decisions.
The Future of Art Investment: Challenges and Opportunities
As we look to the future, several factors are likely to shape the art investment landscape:
1. Technological Integration: Expect significant advancements in digital tools for valuation, authentication, and portfolio management. This tech revolution will enhance transparency in the market and potentially attract more tech-savvy investors to the art world.
2. Shift Towards Private Sales: As public auctions face challenges, particularly with single-owner collections, there will likely be a noticeable shift towards private transactions. This trend could reshape how high-value artworks change hands in the future.
3. Sustainability and Ethical Considerations: As environmental and social concerns become increasingly important to investors, expect to see a growing focus on sustainable practices in art production, transportation, and exhibition.
4. Emerging Markets: Keep an eye on emerging art markets in Asia, Africa, and Latin America, which may offer new opportunities for diversification and potential high returns.
5. Regulatory Changes: As the art market becomes more financialized, it may face increased regulatory scrutiny. Stay informed about potential changes in tax laws, anti-money laundering regulations, and other legal considerations that could impact art investments.
Platforms and fairs for art investing
Over the past five years, art dealers have significantly increased their use of online channels for transactions, driven by advancements in online viewing rooms and imaging technology. The COVID-19 pandemic notably boosted online sales from 13% in 2019 to 39% in 2020. As live events resumed, this share decreased but remained higher than pre-pandemic levels, stabilizing at 23% in 2023.
Dealers’ own online-only sales saw the most significant growth, doubling in share since 2019 and accounting for 20% of total sales in 2023. In contrast, sales through online art fairs and third-party platforms remained minimal. High Net Worth (HNW) collectors showed a strong preference for purchasing through dealers’ websites, though a majority still preferred in-person transactions.
The proportion of online sales to new buyers, who had never visited the gallery in person, fluctuated, indicating challenges in converting these buyers into regular clients. Larger galleries saw a higher share of regular online buyers, while smaller galleries experienced mixed success with new clients.
Despite the growth in e-commerce, dealers continued to face challenges, including political and economic instability, which affected demand. Many dealers had to offer higher discounts to close sales in 2023. Looking ahead, nearly half of the dealers expect online sales to grow in 2024, highlighting the ongoing importance of digital strategies in the art market.
Below are the most popular online platforms and offline events for exploring art investing:
1.Masterworks:
- Description: Masterworks allows investors to buy shares in high-value artworks. The platform purchases paintings and then offers shares to investors, who can benefit from the appreciation of the artwork’s value over time.
- Website: Masterworks
2.Artsy:
- Description: Artsy is an online platform that connects collectors with galleries and artists. It offers a wide range of artworks for purchase, allowing investors to buy pieces directly from the platform.
- Website: Artsy
3. Art Investment Platform (AIP):
- Description: AIP provides a marketplace for investing in contemporary art. They offer a range of services including art advisory and portfolio management.
- Website: Art Investment Platform
4. Saatchi Art:
- Description: Saatchi Art is an online gallery that allows collectors to purchase original artwork and prints directly from artists around the world. It offers a wide selection of contemporary art.
- Website: Saatchi Art
5. Yieldstreet:
- Description: Yieldstreet is an alternative investment platform that includes art among its offerings. Investors can participate in asset-backed art investments with the potential for attractive returns.
- Website: Yieldstreet
6.Maecenas:
- Description: Maecenas is a blockchain-based platform that allows investors to buy fractional ownership in high-value artworks. It leverages blockchain technology to ensure transparency and security.
- Website: Maecenas
7.Artfinder:
- Description: Artfinder is an online marketplace where collectors can buy original art directly from independent artists. It features a diverse range of artworks, from paintings to sculptures.
- Website: Artfinder
8.Rarity:
- Description: Rarity is a platform that specializes in rare and limited-edition artworks. Investors can buy and trade rare art pieces, with a focus on high-value and collectible items.
- Website: Rarity
Finding new and promising artists who may be good investment opportunities often involves attending key art events and exhibitions. Here are some of the best events and exhibitions for discovering emerging talent:
1.Major Art FairsArt Basel (Switzerland, Miami, Hong Kong)
- Renowned for showcasing contemporary art from leading galleries worldwide. It’s a premier event for discovering both established and emerging artists.
- Art Basel
2.Frieze Art Fair (London, New York, Los Angeles)
- Focuses on contemporary art and features a mix of established and emerging artists. It includes Frieze Masters, which showcases historical art.
- Frieze
3.The Armory Show (New York)
- A leading international art fair showcasing important 20th- and 21st-century artworks, with a strong emphasis on new artists.
- The Armory Show
4.Art Brussels (Belgium)
- Known for its focus on discovery, it offers a platform for both established and emerging artists, with a strong emphasis on the latter.
- Art Brussels
5.Venice Biennale (Italy)
- One of the most prestigious cultural events, featuring contemporary artists from around the world. It’s a key venue for discovering new talent.
- Venice Biennale
Venice Biennale 2024: experience and its implications for art investors
Attending the Venice Biennale can be an overwhelming experience for aspiring art investors. The event spans kilometres of beautiful and thought-provoking art, but it’s incredibly time-consuming and often the most engaging pavilions don’t necessarily align with the best investment opportunities. For instance, one of the most popular and fun exhibits; Serbian pavilion’s “Exposition coloniale” offers a profound exploration of colonialism’s lasting impact, challenging viewers to reexamine power dynamics and societal anxieties. Visitors would spend around 20 mins enjoying the immersive and sensory stimulating time machine that pushes you into the early 90s. Similarly, Zimbabwe’s pavilion presents a visually striking and conceptually rich exhibition centred around the concept of “kududunuka,” or unravelling, which pushes boundaries of time, identity, and nationhood in a sustainable way. While these exhibitions are incredibly intellectually stimulating and culturally significant, they may not translate directly into lucrative investments. The sheer volume of stimuli at the Biennale can be daunting for newcomers to the art investment world. As such, alternative approaches like fractional ownership or online sales platforms may offer a less immersive but more accessible entry point into art investing, allowing individuals to gradually build their knowledge and confidence without the sensory overload of major international exhibitions.
Conclusion: The Art of Long-Term Thinking
Investing in art requires a delicate balance of passion and pragmatism. While the market may face headwinds in the short term, the long-term prospects for art as an investment remain strong. As with any investment, a well-informed, diversified, and patient approach is likely to yield the best results.
For HNWIs looking to combine cultural appreciation with portfolio diversification, the art market in 2024 offers a canvas rich with potential. By staying attuned to market trends, embracing technological innovations, and focusing on quality and long-term value, investors can navigate the challenges of today’s art market and potentially reap significant rewards in the future.
As we move forward, it’s clear that the art market will continue to evolve, influenced by global economic trends, technological advancements, and shifting cultural values. Those who approach art investment with a blend of passion, knowledge, and strategic thinking will be best positioned to succeed in this dynamic and fascinating market.
In the end, investing in art is not just about financial returns; it’s about participating in the ongoing dialogue of human creativity and cultural expression. As you consider adding art to your investment portfolio, remember that beyond the potential for financial gain, you’re also acquiring a piece of history, culture, and human ingenuity. It’s this dual nature of art as both an asset and a cultural artifact that makes it a uniquely rewarding investment for those willing to navigate its complex landscape.
10 Day Trading Tips and How To Get Started
Day trading is a strategy that involves buying and selling financial instruments at least once within the same day, attempting to profit from small price fluctuations. This approach can be lucrative, but it can also be risky if undertaken without a thoughtful strategy.
The best day trading platforms help traders improve their strategies and minimize their costs, offering apps that make it easy to analyze indicators and execute trades. Interactive Brokers and Webull, for example, offer real-time streaming quotes, charting tools, and the ability to enter and modify complex orders in quick succession.
But for those who are just beginning their day trading journey, this article will explain the key steps to getting started and explore 10-day trading tips for beginners—from setting aside funds and starting small to avoiding penny stocks and limiting losses.
Key Takeaways
- Day trading is only profitable in the long run when traders take it seriously and do their research.
- Day traders must be diligent, focused, objective, and unemotional in their work.
- Interactive Brokers and Webull are two recommended online brokers for day traders.
- Day traders often look at liquidity, volatility, and volume when deciding what stocks to buy.
- Some tools that day traders use to pinpoint buying points include candlestick chart patterns, trend lines and triangles, and volume.
How To Start Day Trading
Getting underway in day trading involves putting your financial resources together, setting up with a broker who can handle day trading volume, and engaging in self-education and strategic planning. Here’s how to start in five steps:
Step 1: Research trading strategies and principles.
Unlike professional day traders, retail day traders don’t necessarily need a special undergraduate degree. However, you still need to educate yourself. Before you start trading, it’s crucial to understand the trading principles and specific strategies used in day trading. Read books, take courses, and study financial markets. The major topic to study is technical analysis, which should include reading up on trading psychology and (this is a must) risk management.
Step 2: Develop your trading plan.
Outline your investment goals, risk tolerance, and specific trading strategies you’ve picked up from Step 1. Your plan should specify your entry and exit criteria, how much capital you will risk on each trade, and your overall risk management strategy. Before investing real money, put your plan into practice with a real-time trading simulator. This helps you familiarize yourself with market behavior and the trading platform without financial risk.
Step 3: Choose a trading platform and fund your account.
You’ll want a reputable broker that caters to day traders and has low transaction fees, quick order execution, and a reliable trading platform. Once you’re ready, fund your account. It’s advisable to begin with a relatively small amount in your trading account and only put in money you can afford to lose.
Step 4: Begin trading with small positions.
This reduces the risks of losing all your money on one or a series of bad trades while you’re still learning. As you do so, continuously review your trades and check them against your learning resources to adjust your strategy. Day trading requires constantly adapting to changing situations.
Step 5: Maintain discipline.
Adjusting to changing circumstances does not mean shifting your stop-loss and stop-limit settings or other trading criteria as you take on more risk. Successful day trading relies very much on discipline and emotional control. Stick to your trading plan; don’t let emotions drive your decisions. That’s the way to quick ruin.
10 Day Trading Tips for Beginners
1. Knowledge Is Power
In addition to knowledge of procedures, day traders need to keep up with the latest stock market news and events that affect stocks. This included the Federal Reserve System’s interest rate plans, leading indicator announcements, and other economic, business, and financial news.
So, do your homework. Make a wish list of stocks you’d like to trade. Be informed about the selected companies, their stocks, and general markets. Scan business news and bookmark reliable online news outlets.
2. Set Aside Funds
Assess and commit to the amount of capital you’re willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000). Moreover, only trade with suitable online brokers and trading platforms.
Earmark funds you can trade with and are prepared to lose.
3. Set Aside Time
Day trading requires your time and attention. In fact, you’ll need to give up most of your day. Don’t consider it if you have limited time to spare.
Day trading requires a trader to track the markets and spot opportunities that can arise at any time during trading hours. Being aware and moving quickly are key.
4. Start Small
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding prospects is easier with just a few stocks. It’s now common to trade fractional shares. That lets you specify smaller dollar amounts that you wish to invest.
This means that if Amazon.com (AMZN) shares are trading at $170, many brokers will now let you buy a fractional share for as low as $5.
5. Avoid Penny Stocks
You’re probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid and the chances of hitting the jackpot with them are often bleak.
Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, steer clear of these. Finding real undervalued stocks can be demanding.
6. Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility. A seasoned player may be able to recognize patterns at the open and time orders to make profits. For beginners, it may be better to read the market without making any moves for the first 15 to 20 minutes.
The middle hours are usually less volatile. Then, the movement begins to pick up again toward the closing bell. Though rush hours offer opportunities, it’s safer for beginners to avoid them at first.
7. Cut Losses With Limit Orders
Decide what type of orders you’ll use to enter and exit trades. Will you use market orders or limit orders? A market order is executed at the best price available, with no price guarantee. It’s useful when you want to enter or exit the market and don’t care about getting filled at a specific price.
A limit order guarantees the price but not the execution.2 Limit orders can help you trade more precisely and confidently because you set the price at which your order should be executed. A limit order can cut your loss on reversals. However, if the market doesn’t reach your price, your order won’t be filled and you’ll maintain your position.
More sophisticated and experienced day traders may also employ options strategies to hedge their positions.
8. Be Realistic About Profits
A strategy doesn’t need to succeed all the time to be profitable. Traders can be successful by only profiting from 50% to 60% of their trades. However, they need to profit more on their winners than they lose on their losers. Ensure the financial risk on each trade is limited to a specific percentage of your account and that entry and exit methods are clearly defined.
9. Reflect on Investment Behavior
For day traders, frequent reflection on investment behavior is crucial. It helps them identify patterns, learn from past mistakes, and fine-tune their strategies. This fosters continuous learning and adapting to ever-changing market conditions. In addition, it encourages discipline and emotional control, which are key to successful trading.
10. Stick to the Plan
Successful traders have to move fast, but they don’t have to think fast. Why? Because they’ve developed a trading strategy in advance, along with the discipline to stick to it. It is important to follow your formula and methodology closely rather than try to chase profits. Don’t let your emotions get the best of you and make you abandon your strategy. Bear in mind a mantra of day traders: plan your trade and trade your plan.
What Makes Day Trading Difficult?
Day trading takes a lot of practice and know-how, and several factors can make it challenging.
First, know that you’re competing against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry, which means they’re set up to succeed. Jumping on the bandwagon usually means more profits for them.
Next, understand that Uncle Sam will want a cut of your profits, no matter how slim. You’ll have to pay taxes on any short-term gains—investments you hold for one year or less—at the marginal rate. The upside is that your losses will offset any gains.3
Also, as a beginning day trader, you may be prone to emotional and psychological biases that affect your trading—for instance, when your capital is involved and you’re losing money on a trade. Experienced, skilled professional traders with deep pockets can usually surmount these challenges.
An early popularizer of day trading, Toby Crabel, is also credited with a classic day trading strategy, the opening range breakout. Crabel has had some influence on technical analysis, and he often suggested that day traders are social psychologists with a computer program.4
Deciding What and When To Buy
What To Buy
Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options). They usually leverage large amounts of capital to do so. In deciding what to buy—a stock, say—a typical day trader looks for three things:
- Liquidity. A security with this allows you to buy and sell it easily and, hopefully, at a reasonable price. Liquidity is an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage, or the difference between the expected price of a trade and the actual price.
- Volatility. This measures the daily price range—the range in which a day trader operates. More volatility means greater potential for profit or loss.
- Trading volume measures the number of times a stock is bought and sold in a given period. It’s commonly known as the average daily trading volume. High volume indicates a lot of interest in a stock. An increase in a stock’s volume is often a harbinger of a price jump, either up or down.
When To Buy
Once you know the stocks (or other assets) you want to trade, you need to identify entry points for your trades. Tools that can help you do this include:
- Real-time news services: News moves stocks, so it’s important to subscribe to services that alert you when potentially market-moving news breaks.
- ECN/Level 2 quotes: Electronic communication networks (ECNs) are computer-based systems that display the best available bid and ask quotes from market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book, which has price quotes from market makers in every Nasdaq-listed and OTC Bulletin Board security.5 Together, they can give you a sense of orders executed in real-time.
- Intraday candlestick charts:Â Candlesticks provide a raw analysis of price action. More on these later.
Define and write down the specific conditions under which you’ll enter a position. For instance, buying during an uptrend isn’t specific enough. Instead, put down something more specific and testable: buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.
Once you have specific entry rules, scan more charts to see if your conditions are generated each day. For instance, determine whether a candlestick chart pattern signals price moves in the direction you anticipate. If so, you have a potential entry point for a strategy.
Next, you’ll need to determine how to exit your trades.
Deciding When To Sell
There are several ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method. They refer to taking a profit at a predetermined price level. Here are some common profit target strategies:
| Strategy | Description |
|---|---|
| Scalping | Scalping is one of the most popular strategies. It involves selling almost immediately after a trade becomes profitable. The price target is whatever figure means that you’ll make money on the trade. |
| Fading | Fading involves shorting stocks after rapid moves upward. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to take profits, and, (3) existing buyers may be scared away. Although risky, this strategy can be extremely rewarding. Here, the price target is when buyers begin stepping in again. |
| Daily Pivots | This strategy involves profiting from a stock’s daily volatility. You attempt to buy at the low of the day and sell at the high of the day. Here, the price target is simply at the next sign of a reversal. |
| Momentum | This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. Another type will fade the price surge. Here, the price target is when volume begins to decrease. |
Often, you will want to sell an asset when there is decreased interest in the stock as indicated by the ECN/Level 2 and volume. The profit target should also allow for more money to be made on winning trades than is lost on losing trades. If your stop loss is $0.05 away from your entry price, your target should be more than $0.05 away.
Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.
Day Trading Charts and Patterns
Here are three common tools day traders use to help them determine opportune buying points:
- Price charts using depictions such as candlesticks. Also, various chart patterns, including engulfing candles, dojis, and many others.
- Other technical analysis, including trend lines and various indicators such as the relative strength index, moving average convergence divergence, and many others.
- Volume
There are many candlestick setups a day trader can look for to find an entry point. If followed correctly, the doji reversal pattern (highlighted in yellow in the chart below) is one of the most reliable.
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Also, look for signs that confirm the pattern:
- A volume spike on the doji candle or the candles immediately following it, which can indicate that traders are supporting the price at this level
- Prior support at this price level, such as the prior low of day or high of day Level 2 activity, which will show all the open orders and order sizes
If you use these three confirmation steps, you may determine whether the doji is signaling an actual turnaround and a potential entry point.
Chart patterns also provide profit targets for exits. For example, the height of a triangle at the widest part is added to the breakout point of the triangle (for an upside breakout), providing a price at which to take profits.6
How To Limit Losses When Day TradingÂ
Stop-Loss Orders
It’s important to define exactly how you’ll limit your trade risk. A stop-loss order is designed to limit losses on a position in a security.7 For long positions, a stop-loss can be placed below a recent low and for short positions, above a recent high. It can also be based on volatility.
For example, if a stock price is moving about $0.05 a minute, then you might place a stop-loss order $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.
For a triangle pattern, a stop-loss order can be placed $0.02 below a recent swing low if buying a breakout, or $0.02 below the pattern.
You could also set two stop-loss orders:
- Place an actual stop-loss order at a price level that suits your risk tolerance. This level represents the most money that you can stand to lose.
- Set a mental stop-loss order at the point where your entry criteria would be violated. If the trade takes an unexpected turn, you’ll immediately exit your position.
However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable.8
Set a Financial Loss Limit
It’s smart to set a maximum loss per day that you can afford. Whenever you hit this point, exit your trade and take the rest of the day off. Stick to your plan. After all, tomorrow is another (trading) day.
Test Your Strategy
You’ve defined how you enter trades and where you’ll place a stop-loss order. Now, you can assess whether the potential strategy fits within your risk limit. If the strategy exposes you to too much risk, you need to alter it in some way to reduce the risk.
If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find entry points that match yours. Note whether your stop-loss order or price target would have been hit. Paper trade in this way for at least 50 to 100 trades. Determine whether the strategy would have been profitable and if the results meet your expectations.
If your strategy works, proceed to trading in a demo account in real time. If you take profits over the course of two months or more in a simulated environment, proceed with day trading with real capital. If the strategy isn’t profitable, start over.
Finally, keep in mind that if you trade on margin, you can be far more vulnerable to sudden price movements. Trading on margin means borrowing your investment funds from a brokerage firm. It requires you to add funds to your account at the end of the day if your trade goes against you. Therefore, using stop-loss orders is crucial when day trading on margin.9
Day Trading Strategies for Beginners
Now that you know some of the ins and outs of day trading, let’s review some of the key techniques new day traders can use.
When you’ve mastered these techniques, developed your own trading styles, and determined your end goals, you can use a series of strategies to help you in your quest for profits.
Although some of these techniques were mentioned above, they are worth going into again:
- Following the trend: Anyone who follows the trend will buy when prices are rising or short sell when they drop. This is done on the assumption that prices that have been rising or falling steadily will continue to do so.
- Contrarian investing: This strategy assumes a rise in prices will reverse and drop. The contrarian buys during a fall or short sells during a rise, with the express expectation that the trend will change.
- Scalping: This is a style by which a speculator exploits small price gaps created by the bid-ask spread. This technique normally involves entering and exiting a position quickly—within minutes or even seconds.
- Trading the news: Investors using this strategy will buy when good news is announced or short sell when there’s bad news. This can lead to greater volatility, which can lead to higher profits or losses.
Why Is It Difficult To Make Money Consistently From Day Trading?
Doing so requires combining many skills and attributes—knowledge, experience, discipline, mental fortitude, and trading acumen.
It’s not always easy for beginners to carry out basic strategies like cutting losses or letting profits run. What’s more, it’s difficult to stick to one’s trading discipline in the face of challenges such as market volatility or significant losses.
Finally, day trading means going against millions of market participants, including trading pros who have access to cutting-edge technology, a wealth of experience and expertise, and very deep pockets. That’s no easy task when everyone is trying to exploit inefficiencies in the markets.
Should a Day Trading Position Be Held Overnight?
A day trader may wish to hold a trading position overnight either to reduce losses on a poor trade or to increase profits on a winning trade. Generally, this is not a good idea if the trader simply wants to avoid booking a loss on a bad trade.
Risks involved in holding a day trading position overnight may include having to meet margin requirements, additional borrowing costs, and the potential impact of negative news. The risk involved in holding a position overnight could outweigh the possibility of a favorable outcome.
How Much Do Day Traders Make?
Day traders’ earnings vary widely based on experience, skill level, trading strategy, and market conditions. Some may earn a substantial income, while others may not be as successful. It’s important to note that day trading involves significant risk and is not suitable for everyone.
Is Day Trading Worth It?
This largely depends on individual circumstances, risk tolerance, and expertise. While it can offer significant profits and flexibility for some, it’s high-risk, time-consuming, and not suitable for everyone. It’s estimated that a majority of day traders don’t profit, indicating the need for careful consideration and preparation.
How Much Money Do I Need To Start Day Trading Stocks?
The Financial Industry Regulatory Authority’s (FINRA) pattern day trader rule requires a $25,000 minimum balance if you want to make four or more day trades within a five-business day span.10 Beyond that, consider transaction costs (commissions, fees) that will eat into your profits and the need for a financial cushion to handle potential losses—the FINRA rule is meant to be a minimum. It’s prudent to have significantly more capital to trade effectively and, frankly, reduce the psychological pressure of trading with money you can’t afford to lose. Day trading is highly risky, and most individual traders don’t achieve success.11 It should be approached with the understanding that it takes significant skill and a high tolerance for risk. Day trading is not the path to quick or easy profits.
The Bottom Line
Day trading is difficult to master. It requires time, skill, and discipline. Many who try it lose money, but the strategies and techniques described above may help you create a potentially profitable strategy.
Day traders, both institutional and individual, play an important role in the marketplace by keeping the markets efficient and liquid. With enough experience, skill-building, and consistent performance evaluation, you may be able to beat the odds and improve your chances of trading profitably.
72 stock market terms every beginner trader should know
By Team Stash
Learning to navigate the stock market as a new investor can be intimidating, but getting familiar with basic stock market terms can get you up and running sooner than you’d think.
Understanding stock market fundamentals is key to making smart investing decisions, keeping a pulse on the market, and eventually taking on more complex trading strategies. Use the terms below to get a jump start on learning basic stock market vocabulary and create a strong foundation for your long-term wealth goals.
What is the stock market?
The stock market is a collection of markets where people buy and sell shares of publicly traded companies. When someone invests in a stock, their investment is represented by a share, or partial ownership, of that company.
The stock market operates by potential buyers naming the highest price they’ll pay for an asset (the “bidâ€) and potential sellers naming the lowest price they’re willing to sell for (the “askâ€). Trades are typically executed by stockbrokers on behalf of individual investors.
72 stock market terms for new investors
The stock market terms below are a great starting point if you’re new to trading stocks. Study these terms to familiarize yourself with common stock lingo that any new investor should understand.
1. Arbitrage
Arbitrage refers to purchasing an asset from one market and selling it to another market where the selling price is higher than what you paid for it, resulting in profit.
2. Ask
An ask is the selling price that a trader offers for their shares.
3. Asset Allocation
Asset allocation is an investment strategy that aims to balance risk and reward by dividing a certain percentage of investments—like stocks, bonds, real estate, cash, etc.—across different assets in an investment portfolio.
4. Asset Classes
Asset classes are categories of assets, such as stocks, bonds, real estate, or cash.
5. Averaging Down
Averaging down is an investing strategy that involves buying additional shares of an asset or stock after its price has fallen, resulting in a lower average purchase price.
6. Bear Market
A bear market is a market condition in which prices are expected to fall. Typically, this entails major indexes or stocks decreasing by 20% or more compared to previous highs.
7. Beta
Beta is the measure of an asset’s risk in relation to the market. A stock with a beta of 1.5 means that the stock typically moves 50% more than the market in the same direction. Generally, a higher beta indicates a riskier investment—if the market rises 10%, the stock will rise by 15%, but if the market falls by 10%, the stock will fall by 15%.
8. Bid
The price a trader is willing to pay for shares of a stock or other asset.
9. Bid-Ask Spread
Bid-ask spread is the difference between what buyers are willing to pay and the price sellers are asking for a stock.
10. Blockchain
A blockchain is a record-keeping database in which transactions made in Bitcoin or other cryptocurrencies are recorded across multiple computers and distributed across the entire network of those computers.
11. Blue-Chip Stocks
Blue-chip stocks are common stocks of well-known companies known for their quality and history of growth.
12. Bond
A bond is a type of security loaned by an investor to a borrower like a company or government used to fund its operations.
13. Bull Market
A bull market is a market condition in which prices are expected to rise.
14. Buyback
A buyback is when a company repurchases outstanding shares to reduce the number of shares on the market and return profits to their investors, resulting in an increased value of the remaining shares.
15. Capitalization
Also known as market cap, capitalization is the total market value of all a company’s outstanding shares. It’s calculated by multiplying the total number of shares by the current share price. Check out the largest companies by market cap here.
16. Capital Gains
Capital gains refers to the profit earned after selling an asset or investment for a higher price than you paid for it.
17. Common Stock
This is one of the most basic stock market terms to know. Common stock is a type of security that represents ownership in a company. Holders of common stock are able to vote on matters like corporate policies and elect directors within that company.
18. Current Ratio
The current ratio is a measure of a company’s ability to pay short-term debt. It’s determined by dividing current assets by current liabilities.
19. Day Trading
Day trading is the practice of buying and selling shares of stock within a single day.
20. Debt-to-Equity Ratio
Debt-to-equity ratio represents a function of a company’s debt relative to its equity, or the value of its assets minus its liabilities. The ratio is found by dividing total liabilities by total shareholder equity.
21. Diversification
Diversification is an investment strategy that divides investment funds across a variety of assets in order to minimize overall risk.
 22. Dividend
“Dividend†is one of the most basic terms for the stock market. It’s simply a portion of a company’s earnings paid out to its shareholders.
23. Dividend Yield
A dividend yield is a dividend expressed as a percentage of its stock price.
24. Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy in which you invest a fixed amount on a regular basis regardless of the price of the asset.
25. Dow Jones Industrial Average (DJIA)
Also known as Dow 30, the Dow Jones Industrial Average is a stock market index consisting of the 30 most-traded blue-chip stocks on the New York Stock Exchange. It’s used to measure the performance of shares among the largest U.S. companies and gauge the overall direction of stock prices.
26. Earnings per Share (EPS)
Earnings per share is a company’s profit divided by its number of outstanding shares, and is used to measure corporate profitability.
27. Economic Bubble
An economic bubble is a situation where asset prices surge to significantly higher levels than the fundamental value of that asset.
28. Equal Weight Rating
An equal weight rating is a measure used by equity analysts to signify how well a stock is performing relative to other stocks. An equal weight rating suggests that a stock will perform similarly with the average of all the stocks being used for comparison.
29. Equity Income
Equity income is used to describe any income received from stock dividends.
30. Exchange
An exchange, or stock exchange, is a marketplace where investors and traders buy and sell stocks. You’ve probably heard of the most well-known exchanges in the U.S.: the New York Stock Exchange (NYSE) and Nasdaq.
31. Exchange-Traded Funds (ETFs)
Commonly known as ETFs, exchange-traded funds are a collection of stocks or bonds combined in a single fund that can be purchased and traded on major stock exchanges. Similar to mutual funds, they’re a pooled investment fund, meaning a “pool†of money is aggregated from multiple investors.
32. Expense Ratio
An expense ratio measures the cost of owning a mutual fund, including expenses like the management of the fund, overhead fees, and any other costs associated with running the fund. It’s essentially an administrative fee paid to the company in return for owning the fund. The ratio is measured as a percentage of your total investment—for example, if you invest $10,000 in a fund with an expense ratio of .20%, you’ll pay $20 on top of your investment.
33. Futures
A future is a contract that requires a buyer to purchase a specific asset, and the seller to sell that asset at a certain future date at an agreed-upon price. Futures are a way for investors to hedge current investments—a risk management strategy intended to offset potential losses in other investments.
34. Going Long
Going long refers to the act of buying stock shares with the expectation that the asset’s price will rise, resulting in a profit.
35. Going Short
Going short—the opposite of going long—refers to the act of selling stock shares with the expectation that the asset’s price will fall. When an investor goes short on an asset, they borrow that asset, sell it, and hopefully purchase it later at a lower price if the price does decline, resulting in profit.
36. Growth and Income Funds
This is a type of mutual fund or ETF that has both a history of capital gains (growth) and income generated from dividends (income). Growth and income funds have a two-sided strategy of both long-term growth and short-term income.
37. Growth Stocks
A growth stockis a common stock of a company whose revenues are expected to grow at a significantly higher rate than what’s average for that industry.
38. Head and Shoulders Pattern
The head and shoulders pattern refers to a specific chart formation seen on a technical analysis chart. It appears when a stock price reaches three peaks: when the price peaks then declines; rises above that peak and declines again; and rises a third time (but not as high as the second peak) and then declines again. The second peak represents the formation’s “head,†and the first and third peaks represent the “shoulders.†It’s generally considered to be an indicator of an impending bear market.
 39. Index Funds
Index funds are investment funds that follow the performance of a specific benchmark or stock market index, like the S&P 500. When you invest in an index fund, your money is used to invest in every company in that index. This results in a more diverse portfolio than if you were hand-selecting individual stocks, for example.
40. Inflation
Inflation is the rate of increase in prices for goods and services in the economy.
41. Initial Public Offering (IPO)
An IPO refers to a previously private company that becomes public by selling stock
shares on the stock market.
42. Limit Order
A limit order is an order to buy or sell a stock at or below a specific price. Limit orders give traders control over how much they pay.
43. Liquidity
Liquidity measures how quickly and easily a stock can be bought or sold without impacting its price. Cash, for example, is the most liquid asset—no exchange is necessary to gain value from it, and it’s already in its most liquid form. On the other hand, a car is less liquid—regardless of its value, you might have to wait to sell it at its best price.
44. Margin
Sometimes referred to as “buying on margin,†margin is when investors borrow money from a broker to purchase a stock, similar to a loan.
45. Market Index
A market index tracks the performance of a certain collection of stocks, often grouped to represent a certain industry. They’re a tool for investors to gauge the health of the stock market by comparing current and past stock prices.
46. Market Volatility
Market volatility is a measure of how much and how often the value of the stock market fluctuates.
47. Moving Average
A moving average is the average price of stocks or other assets over a specific period of time. Generally used in technical analysis charts, it’s calculated by averaging data from the previous time periods to help investors identify the current direction of price trends.
48. Mutual Funds
Mutual funds are pools of investments from shareholders used to “mutually†buy securities like stocks, bonds, and other assets.
49. Nasdaq
Nasdaq, or National Association of Securities Dealers Automated Quotations, is an electronic exchange where investors can buy and sell stocks through an automated network of computers. It’s the second-largest stock exchange in the world, following the NYSE.
More broadly, Nasdaq can also refer to the Nasdaq Composite Index, a stock market index of over 3,300 companies listed on the Nasdaq exchange. In this context, it can be thought of similarly to other indexes like the DJIA or the S&P 500.
50. Non-Fungible Token (NFT)
A non-fungible token, more commonly known as an NFT, is a blockchain-based financial security. Each NFT represents a unique digital asset. “Non-fungible†indicates that it can’t be replicated or replaced with something else.
51. Order Imbalance
An order imbalance occurs when orders of one type of stock aren’t offset by opposite orders, resulting in an excess of orders for that specific stock and sometimes volatile price changes.
52. OTC Stocks
OTC stocks, or over-the-counter stocks, are securities that are traded on a broker-dealer network instead of on a major U.S. stock exchange. They’re often used by smaller companies who don’t meet the requirements to be listed on a formal stock exchange.
53. Outstanding Shares
Outstanding shares refers to the total number of a company’s shares that have been issued to shareholders, including restricted shares.
54. P/E Ratio
Used to value a company, the P/E ratio, or price-earnings ratio, is the ratio of a company’s share price to the company’s earnings per share.
55. Preferred Stock
Preferred stock is a type of stock that combines characteristics of both common stock and bonds. Owners of preferred stock receive different rights than common stockholders, like receiving dividends before common stockholders, but they generally don’t come with corporate voting rights like common stocks do.
56. Price Quote
A price quote is the price of a stock or other security as quoted on an exchange. Price quotes usually come with important supplemental information to help traders make more informed investment decisions.
57. Profit Margin
Profit margins are used to gauge the profitability of a company. It’s expressed as a percentage and is calculated by dividing the company’s net profit (total revenue minus total expenses) by total revenue.
58. Recession
A recession is defined as a period of decline in economic performance throughout the economy, generally lasting for at least several months.
59. Risk Tolerance
Risk tolerance is a measure of the level of risk you’re willing to accept on your investments. Someone with a lower risk tolerance typically sees lower returns on their investments in exchange for lower overall risk in periods of market decline.
60. Roth IRA
A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, allowing your earnings to grow and be withdrawn tax-free.
61. Sector
The stock market includes shares from thousands of different companies, which are broken into 11 different sectors. A sector is a group of companies with similar business products, services, or characteristics.
62. Shares
Shares are units of ownership in part of a company’s total stock.
63. Stock Market Holidays
While this isn’t necessarily a term or definition, it’s important to know what days you can and can’t buy or sell on the U.S. stock exchange. The U.S. stock market observes 10 holidays a year, closing on those days. In 2024, the observed holidays are New Years Day, Martin Luther King Jr. Day, President’s Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
64. Stock Option
A stock option is a contract that gives an investor the right to purchase or sell a specific number of stock shares at a predetermined price within a specified time period.
65. Stock Portfolio
A stock portfolio is an individual’s collection of investments, including stocks, bonds, mutual funds, and other financial assets. While a portfolio refers to all of your investments, they might not be contained in one single account.
66. Stock Split
A stock split occurs when a corporation increases the number of its outstanding shares by distributing more shares to current stockholders. By splitting existing shares into multiple new shares, the stock becomes more affordable.
67. Time Horizon
Time horizon refers to the period of time an investor expects to hold an investment, which will vary based on personal investment goals and strategies. For example, investing in a retirement account like a 401(k) has a longer time horizon, since the funds won’t be withdrawn until you reach retirement age. Generally speaking, longer time horizons correlate to more risk potential in a portfolio, and shorter time horizons correlate to a more conservative (less risky) portfolio.
68. Value Stocks
Value stocks are shares of companies selling at bargain prices that investors expect to rise because the company’s financial fundamentals suggest the shares are actually worth more than the current value.
69. Volume
Volume is a measure of how much a certain stock or other investment has been traded over a certain period of time. Volume is a critical component of strategically analyzing stock market trends, and is often used to determine market strength.
70. Volume-Weighted Average Price (VWAP)
Volume-weighted average price (VWAP) is a measure of the average trading price of a stock or other asset, adjusted for volume. It’s calculated by dividing the total dollar value of trading in that asset by the volume of trades.
71. Yield
Yield refers to the income earned on an investment over a set period of time, expressed as a percentage of your original investment.
72. 52-week Range
The 52-week range is a technical indicator that measures the lowest and highest price of a stock traded during a 52-week period. Traders use this measure to analyze current stock prices and predict its future movements.
Learning to navigate the stock market and stock trade terms for the first time might feel daunting, but consider this your official first step on the path to developing your investing muscles. When you come across a term you’re unfamiliar with in your own research, refer back to this post until you’ve mastered them. You’ll find that learning these stock terms for beginners is more doable than you think.
The more time you invest in learning stock market terms and fundamentals, the more confident you’ll become as an investor. And if you’re looking for a little more support, consider turning to a platform like Stash. We make it easy to invest what you can afford on a set schedule, all the while providing unlimited financial education and personalized advice based on your risk level—so you can start building long-term wealth, even if you’ve never invested before.
Warren Buffett’s investment advice: Top 10 tips for investing success
Written by James Royal Ph.D. Edited By Brian Beers
Warren Buffett is known as one of the best investors of all time, and he’s amassed more than a hundred-billion dollar fortune through his company Berkshire Hathaway. But he’s not only a great investor, he’s also a great wit, and Buffett enjoys sharing his folksy wisdom with fellow investors.
His advice runs the gamut of topics, not only about investing but about life in general. But today let’s stick to Buffett’s advice that could help make you rich. Here’s the surprising thing – Buffett’s wisdom seems so common sense and practical, and yet it can lead to great wealth.
Top 10 investing tips from Warren Buffett
Below are ten of Buffett’s more widely known aphorisms and what they mean for investors.
1. “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.â€
Buffett’s point sounds simple here, but it’s disarmingly complex. Of course, as an investor you’re trying to profit in the market, but one of the best ways to do that is by avoiding loss. When you eliminate decisions that expose your portfolio to loss, what’s left is more likely to be a gain. When you have more money in your portfolio, you can compound your gains even faster.
This approach has implications for how you invest. Buffett’s quote suggests that instead of looking for the highest upside, you should be looking to avoid loss first and only then look at gains. That’s a different mindset from investors who view the stock market as a slot machine.
2. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.â€
While some value investors focus on buying only the cheapest companies, Buffett suggests a better course of action is to buy “wonderful†companies – those with better economics and competitive positions. Part of the difficulty here is that whereas fair companies may go on sale relatively frequently, the great companies rarely look cheap.
But a company with a good competitive advantage will likely continue to make money over time, and it can bail you out if you purchase at a too-high price. That may not be the case for a fair company, which may falter and never return to your purchase price or beyond it.
Some of the high-quality companies Buffett has invested heavily in over the years include:
- Apple (AAPL)
- American Express (AXP)
- Coca-Cola (KO)
- Moody’s Corp. (MCO)
- See’s Candy Shops
Apple was the largest position in Berkshire Hathaway’s stock portfolio as of 2024.
3. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.â€
Here Buffett suggests that when you see an opportunity you need to act quickly and decisively. When the odds are stacked in your favor – such as when stock prices are down significantly – you need to invest heavily, because good prices might not come along again soon.
Buffett often takes this approach when markets are down significantly. He amasses a ton of cash during the good times, and then invests aggressively when stocks plunge. Having a lot of safe cash on hand allows him to use this strategy.
4. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.â€
While some investors think investing is a lot about the numbers, Buffett suggests that investing has much to do with the behavior of investors themselves. When investors are greedy and push the prices of stocks to the sky, Buffett becomes fearful, because a market plunge may soon follow.
In contrast, when investors run away from the market or a specific stock, Buffett becomes more interested because prices are cheaper. When stocks are cheaper, they don’t have the same risk as when they’re expensive. And this is how Buffett thinks about avoiding losses.
In early 2020, the market plunged as worries about COVID rattled investors. However, some investors dove into the market amid the fear, and the market rallied furiously off its lows.
5. “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.â€
Here again Buffett touches on the value of temperament for a successful investor rather than intelligence. Rather than trying to go with or against the crowd, investors should analyze what’s going on in the market, regardless of who likes what stock. By focusing on the objective facts, investors can make decisions that are relatively free of emotion and make better choices.
6. “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.â€
This quote is one of Buffett’s most famous, and it offers the essence of picking your opportunity. You needn’t invest until you find an opportunity that you find attractive, one that meets your standards of potential reward for the risk you’re taking.
Again, Buffett counsels investors to wait until they find an opportunity that is unlikely to lose them money. You don’t have to take any chance on a stock that you don’t find attractive or a business you don’t understand.
7. “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.â€
Buffett has long advised most investors to use index funds to invest in the market, rather than trying to pick individual stocks. By picking individual stocks you’re working against the pros who have extensive intelligence on companies. In contrast, if you buy an index fund based on the Standard & Poor’s 500 index, you’ll own the market, the target that everyone is aiming to beat.
By all means, if you enjoy investing, then do it, but most investors are going to be well served by using an index fund and especially by avoiding trading in and out of stocks. Another advantage of using index funds – immediate diversification, which lessens your risk. (See Rule No. 1.)
8. “You don’t get paid for activity, you only get paid for being right.â€
There’s no shortage of stock market analysts and commentators who are willing to tell you what you should be doing with your money at any given time. Here, Buffett reminds investors that being an active trader who constantly switches from position to position isn’t likely to produce great returns. Activity can feel productive in the world of investing, but the only thing that matters is whether you were right in your analysis.
9. “At the business school, I tell them that they would all be better off if when they got out of school somebody gave them a card with 20 punches on it and every time they made an investment decision, they used up a punch.â€
Buffett uses the punch card example to stress the importance of thinking hard about the investments you make. If you only get 20 punches in your lifetime, you’re not going to be taking a flier on a stock you heard about from your neighbor. You should reserve your investments for businesses that you truly understand and where you think you’re paying an attractive price. If you could only make 20 investments in a lifetime, you probably wouldn’t be careless in your buying or selling.
10. “After all, you only find out who is swimming naked when the tide goes out.â€
Investing can feel easy at times. Bull markets can last a long time and rallies can be fierce. But Buffett tells us that it’s only when things get tough that we find out who’s really protected and prepared to outlast the storm. At several points in his investing career, Buffett has temporarily appeared out of step with the current climate. But inevitably, the environment shifts and those who once looked smart are revealed to be swimming without their trunks on. Always make sure that your portfolio is positioned to survive a bear market.
Bottom line
While Warren Buffett may be one of most successful investors ever, his investment approach can be shared by many investors, even if they don’t want to spend a lot of time in the market. Focus on implementing Buffett’s principles and you too could become wealthy or increase your net worth substantially.
You have a 72% chance of making money in stocks in 2025
There’s a 73% probability the U.S. stock market will rise in 2025. These odds seem too good to be true, of course, since the market this year has already produced a well-above-average return — 28.2% as of Dec. 16, as measured by the Vanguard Total Stock Market ETF VTI+0.14%.
That’s triple the U.S. market’s average calendar-year return of 9.2% going back to 1794 (according to the database constructed by Edward McQuarrie, an emeritus professor at Santa Clara [Calif.] University).
Yet the market’s odds of rising in a given year are remarkably indifferent to what came before. Based on all calendar years in McQuarrie’s database, the market’s odds of rising in any given year are 73%. Following calendar years in which stocks rose, those odds are a statistically indistinguishable 72%.
What about five-calendar-year periods over which the market rose? Those odds would apply to 2025, since over the past five years the Vanguard Total Stock Market ETF has produced a 14.9% annualized return. The odds of the market rising in a calendar year following five-year gains are once again statistically similar — 72%.
What are the odds when coming off decade-long advances, such as the last one — over which the Vanguard ETF has produced a 13.4% annualized return. Following 10-year periods in which the market rose, the odds of the market rising in the subsequent calendar year are 73%. (These odds are plotted in the chart above.)
A gambling analogy helps illustrate what these statistics mean. Ask yourself: What odds would you place on a coin flip coming up heads if it had come up heads in each of the five previous flips? Or if the previous five flips had each come up tails? Many of us give different answers to these two hypotheticals, as if the odds that apply to the sixth flip have anything to do with what came before. They do not, of course, since the coin has no memory: The odds of that sixth flip coming up heads are always 50%. To think otherwise is to be guilty of what is known as the gambler’s fallacy.
It makes theoretical sense that the same is true of the stock market. If the odds of the market rising in a given calendar year were actually correlated with what had come before, then shrewd traders wouldn’t wait until January of that next year to exploit that correlation. They would instead place their bets in the preceding November or December, with the consequence that the gain or loss that otherwise would occur in that year would be transferred to those prior months. The net effect would be the correlation’s disappearance.
You may have other reasons to expect equities to do particularly well or poorly in 2025, of course. The stock market is extremely overvalued, for example, according to almost any valuation measure with a decent long-term record. But valuation only exerts its gravitational pull on the market over long periods of time, such as a decade. Over shorter periods, including calendar years, valuation indicators have relatively little predictive ability.
The bottom line? Based only on how the stock market performed this year, the odds of the stock market rising in 2025 are no higher or lower than they would be if equities were currently sitting on a big year-to-date loss.
Stock Picking Success: Batting Average Or Slugging Percentage?
The passing of Pete Rose this year brought to mind the discussion of batting average versus slugging percentage for stock selection and portfolio management. Pete Rose had a lifetime batting average of .303 with 4,256 hits in his 24-year baseball career. This means he got a hit almost once in every three at-bats, which is an outstanding result but doesn’t get him into the top ten all-time for Major League Baseball. According to MLB, Josh Gibson holds the record for the highest career batting average at .372.
On the other hand, Babe Ruth has the all-time highest slugging percentage at .6897, with a batting average of .342. The slugging percentage measures the total number of bases a player gets per at-bat, so it considers the player’s power rather than counting all hits the same as with the batting average. Interestingly, Babe Ruth also failed a lot, striking out 14.4% of the time he was at the plate. Pete Rose, by contrast, had a very low strikeout percentage of 8.1%.
So, what does all this have to do with picking stocks and managing stock portfolios?
Despite having a Babe Ruth-like slugging percentage, the U.S. stock market has a high strikeout average. According to a fascinating paper by Hendrik Bessembinder recently examining the returns on 29,078 U.S. stocks from 1926 through 2023, over half of all stocks, 51.6% to be precise, had negative cumulative returns. How does the stock market have long-term nominal and after-inflation returns higher than any other asset class while more than half of the stocks fall in value while publicly traded?
PROMOTED
The complex mathematical answer is that stock returns have strong positive skewness. However, a simple example of long-term positive compound returns provides an easier-to-digest answer. Take a portfolio of just two stocks selling for $100 per share. The first stock grows at 9.8% annualized, while the second stock falls by 9.8% annualized over thirty years. One would think our total portfolio would stagnate during that period since the losses in one stock would offset the other, but compound returns make our intuition incorrect. The exponential return on our positively performing company outweighs the loser. This portfolio grew to be worth $1,657, a 7.3% annualized rate. In other words, the highest-performing stocks more than compensate for the losers over time.
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Pick your player: Pete Rose or Babe Ruth?
All other things being equal, you would pick Babe Ruth for your team since his power more than made up in production for the strikeout. Frankly, you would want both on your team if you could. But should investors seek a high batting average or swing for the fences? In his book More Than You Know, Michael Mauboussin provides a robust rationale that one should also strive to be the Babe Ruth of investors.The video player is currently playing an ad.
He notes that “the frequency of correctness does not matter; it is the magnitude of the correctness that matters.†The dollar change in a portfolio counts as success in investing, not the percentage of stocks with a positive outcome. Much like the stock market as a whole, a successful investment portfolio typically has exceptional stocks that more than overcome the subpar returns of the duds.
Crucial Implications For Investors
Mauboussin notes that investors must consider probabilities when investing in a stock since we know that significant losses and winners in a few stocks are the likely drivers of success versus failure in investment excellence. He quotes the late, great Charlie Munger speaking about the thought process of Berkshire Hathaway’s (BRK/A, BRK/B) Warren Buffett, “Take the probability of the loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we are trying to do. It’s imperfect, but that’s what it is all about.â€
Trying to hit home runs does not mean buying the riskiest stocks. Contrary to academic teaching on the subject, riskier stocks, as defined by higher volatility, do not provide investors with higher returns. Furthermore, a few lethal losses can destroy the performance of a portfolio. While Buffett began his investing career buying “cigar butts,†low-quality but cheap companies with one more “puff†left in them, he evolved to focus on higher-quality companies with Munger’s influence. Buffett now says that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.â€
According to Howard Marks, Warren Buffett, the greatest investor of all time, is credited with just twelve sensational winners in his career. Charlie Munger told Marks that the “vast majority of his own wealth came not from twelve winners, but only four.†The key was to find and hold onto those winners while avoiding significant losses. Alas, in the words of Warren Buffett, “investing is simple, but not easy.â€
Don’t Invest Alone. Get a Investment Mentor
After talking to hundred of investors I’ve learned that the majority go into the experience with the feeling that they’re doing this for themselves, and so they’re on their own. They seek the education and the hand-holding they need to do it themselves. Which is fine if that’s what they want to do. But I’ve found that investing is much easier and much more enjoyable when you do it with someone else. Peers and mentors have helped me to gain more from my investments, and I’ve also made lasting friendships with people I’ll know and love for the rest of my life. Now I don’t mean going into joint investments with these people, but talking about the routes you’re taking and the things you invest in, sharing tips and pointers, and going on that journey together. An investment mentor can do a lot for you.
Looking at having peers and mentors that are doing more than you, are putting more value than you are contributing, that is a powerful person to have in your life. If you don’t have that person and there is not this drive to meet that level or get to that next point of resistance then I would say that’s one place to start. Now, it doesn’t have to be someone you hang out with all the time, it doesn’t have to be someone you have a relationship with. We live in a world where you can get on a podcast and you can listen and find personas or find people that are doing amazing things and use them as your mentor and use some of the things they’re doing as your goal and that’s what’s going to kind of push you along and hit really that other need that we have.
Now, I think the idea of these needs, they’re different for people and sometimes are even different based on the circumstance you’re in in your life. Looking again at this growth side of things, it’s just one of those principles that’s going to continue to push you and you can either deny it or you can accept it. Accepting that principle is incredibly empowering because I think if you accept it, now there’s some accountability associated with it. You know that you have to be growing and whether it’s through books or courses or personal development seminars or whatever, you’re gonna try to get yourself driven, get yourself motivated and pushed to that next level.
So let’s maybe go through a few other needs. And there have been studies on this Abraham Maslow is big into it, Tony Robbins is huge into this. We have a lot of these kind of gurus that are out there that have really kind of discovered some various similar principles and they’ve organized them in different ways. There’s really two ways to do it. You can just live life and experience things and try to figure it out on the fly or you can learn from people that have discovered them already.
Q: Why is it important to have an investment mentor in your financial journey?
A: Having an investment mentor is crucial because it provides guidance, knowledge, and expertise that can help individuals make informed investment decisions, avoid common pitfalls, and achieve their financial goals more effectively.
Q: How can individuals find a suitable investment mentor?
A: Finding a suitable mentor involves networking, seeking recommendations from trusted sources, and researching potential mentors. It’s essential to identify someone with relevant experience and a willingness to share their insights.
Q: What are some of the valuable benefits that individuals can gain from having an investment mentor?
A: Benefits of having a mentor include gaining access to industry knowledge, learning from real-world experiences, receiving personalized advice, and building confidence in one’s investment decisions.
Boss level: The gaming ecosystem powers up
Over the past 50 years, gaming has evolved from simple experiences like Pong into sophisticated virtual worlds where over 3 billion video game consumers engage today. Leveraging advanced graphics, artificial intelligence and seamless online connectivity, modern games offer rich, dynamic experiences considered science fiction just a few decades ago. Casual gaming has surged, making gaming a daily pastime for many, even those who don’t see themselves as traditional gamers. As gaming becomes increasingly ubiquitous and accessible via mobile and other digital devices, the landscape is ripe with opportunity for founders and investors.
Gaming is omnipresent
No longer are video games confined to a single platform or medium—they are everywhere. From blockbuster movies and TV shows inspired by iconic game franchises to gaming streamers who have turned social media platforms into bustling hubs of gaming culture, gaming has never been more accessible. According to the Entertainment Software Association, in 2023, 78% of U.S. households reported playing a video game on a mobile device in the past 12 months, up from 33% in 2012.1 This widespread accessibility has led to a significant portion of the U.S. population engaging in the activity regularly, with 61% of Americans reporting they play video games at least one hour every week. A growing population of gamers creates a greater need for new content and game genres, presenting an exciting opportunity for gaming startup founders.
More gamers, more innovation (and competition)
Unlike traditional tech startups that focus on scaling software solutions, gaming companies typically focus on creating compelling intellectual property (IP) to capture and retain a player base. This IP-led approach distinguishes the gaming industry from others, where the primary value is derived from the unique content and experiences provided. However, creating compelling IP is easier said than done. The proliferation of gamers has led to a significant increase in the number of titles being released and a surge in new developers entering the market.
Indeed, expanded consumer interest provides opportunities for early-stage developers to create innovative IP as more niche markets and genres become viable. However, the sheer volume of content releases across major platforms also intensifies competitive pressure. In this case, founders may pursue venture capital to bolster resources and access industry expertise.
The gaming startup ecosystem is maturing
Roughly half of active venture-backed gaming startups today are focusing on content creation, reflecting a high demand for new IP. However, over the past decade, there has also been a notable increase in startups specializing in two areas:
- Development: Game engines, development tools and technology services
- Experiences: Streaming services, coaching and training, social and community, marketplace and rewards
As the industry evolves, there is an increasing need for advanced tools and services that support and enhance content creation. Moreover, startups in development and experiences play a key role in making gaming even more accessible by enhancing aspects of modern gaming such as livestreaming and sharing content with friends, ultimately facilitating wider gaming consumption and fostering a more inclusive gaming environment.
Where venture capital investors are putting money to work
Venture capital funding plays a vital role in the gaming industry, helping accelerate time to market and allowing developers to capitalize on emerging trends. VC investments into gaming startups have risen drastically from a decade ago; the amount of capital invested in gaming has increased 3.7 times from 2014 to 2024 YTD, surpassing the growth rate of the broader venture capital market, which has expanded by approximately 1.5 times over the same period.
In 2021, total U.S. venture funding into gaming startups peaked at $11.2 billion. Like virtually every other industry, venture activity has fallen sharply since 2021, however 2024 is showing some bright spots. $3.7 billion of capital has been invested into gaming startups through August 2024, which is nearly double the sum invested over all of last year. Assuming VC investment in gaming companies continues at a similar rate through the end of the year, 2024 could end with roughly $5.5 billion in total investments—the third-highest year on record.
The majority of VC funding goes into gaming startups focusing on content development. Year to date, roughly 65% of the approximately $5 billion of venture capital invested in the gaming sector globally has gone to content-focused startups.
This trend clearly underscores investors’ ongoing belief in the power of IP to drive growth in the gaming industry, and it highlights the enduring value placed on developing compelling titles that can capture and sustain the attention of a broad (and broadening) gaming audience.
Conversely, valuation data reveals a nuanced picture. While content-focused startups continue to garner the largest share of capital flows into the gaming sector, startups focused on development and experiences command the highest valuation premiums. These areas of the gaming ecosystem are key to unlocking and enabling broader industry growth, given their potential to scale and ability to support a wide range of content creators.
For founders, while there is substantial opportunity in content creation, investor behavior suggests there is significant value in building the infrastructure and platforms that support content and enhance player experiences. This is evident in the rise of partnerships between gaming studios and infrastructure providers such as AWS, Google Cloud and others. These providers enable developers to scale globally, reduce latency and focus on creating content without the burden of managing servers or complex backend systems. Startups that can deliver solutions by leveraging gaming infrastructure (or creating it in-house) may be well-positioned to attract venture capital at a premium valuation and potentially benefit from a more stable and scalable business model compared with content-focused peers, which may face higher risks associated with the unpredictability of content success.
Will artificial intelligence define tomorrow’s gaming landscape?
Recent advancement in AI will play a transformative role in game development, offering both immediate enhancements and longer-term shifts in how the industry operates. From streamlining creative processes to building entirely new gaming experiences, AI is rapidly becoming a core tool for developers. According to a survey conducted by Bain & Company, video game industry executives believe generative AI could manage more than half of game development within 5 to 10 years, up from less than 5% today.
The ability to rapidly develop and iterate games keeps them relevant in an industry where player preferences can shift overnight. With the rise of cloud-based development tools, remote and distributed teams can collaborate more efficiently and effectively, reducing the overhead costs typically associated with game development. These innovations provide an opportunity for startups with limited resources to compete with larger studios, develop more IP and infrastructure, and capitalize on emerging trends.
Key considerations for game development startups
In the evolving landscape of game development, startups must navigate a complex array of challenges and opportunities to succeed. Here are some priorities to consider:
- Build a deep bench of creative directors:Creative directors are essential for developing compelling gaming experiences. A diverse and deep talent pool is critical for creating the narratives that will set a company’s IP apart from its competitors.
- Pursue impactful ideas:Tomorrow’s successful gaming startups will focus on ideas that offer meaningful value beyond just gameplay. This commitment to creating experiences that resonate on a deeper level can enhance user engagement and loyalty  and contribute to long-term success.
- Focus on efficient operations:This will be necessary to allow fast, iterative game development, reducing time to market.
- Access AI expertise: AI will be crucial for gaming startups to keep pace with the industry.
- Develop evangelists and advocates:An active and engaged community can promote releases and provide critical feedback, especially to newer gaming startups.