How to Think Like a Stock Market Analyst

Andrew Carpenter
September 27, 2017

If you want to succeed in the stock market, you've got to learn how to think like a stock market analyst. With the right analytical skills and perspectives, you'll be able to make smart stock market decisions and see the returns you'd hoped for - and more. You don't even need a lot of base knowledge to get started. Just having the mindset of a stock market analyst can make a huge difference.

Learn how an analyst reads and reacts to the data so you can put it into practice yourself. Read on to find out what you need to know.

1. Think About the Near Term

Many people believe investing is all about focusing on the long term.It's good to keep a long-term perspective, but making decisions based on near-term risks and variables can actually be a good idea. When your decision is made solely on the long term perspective, you can miss out on critical information that will hurt your investments.

For example, buying stock in a large car company because it's inexpensive at the time may seem like a good idea. However, if near-term factors cause fuel prices to rise, those stocks might lose a lot of value in a short amount of time.

If you pay attention to near-term information that can affect your stocks (such as whether fuel costs are going up or down, in the above scenario) you can avoid trouble and make smarter investment decisions. The long term is always the ultimate consideration when it comes to your investments, but that doesn't mean you should neglect to think about the short term entirely. Consider near-term events, such as political changes or oil prices, and think about how they will affect your long-term decisions.

2. Don't Panic

One thing stock market analysts are great at is not panicking. When we get into a panicked state of mind, we're no longer capable of making good, rational decisions. Panic can cause you to sell stock too early, or to make unwise purchases.

When our investments are in question, of course, feelings of panic are bound to arise. It's all about learning how to control those feelings, rather than letting them control you. If you feel scared or uncertain while learning the stock market, use that to motivate you. There is a lot at stake - but rather than feeling frightened, you should feel inspired to do more research so you can succeed.

Remember, bad market news is bound to happen. Keep a level head when things aren't looking great for the market. Examine all factors at play before you decide to take action. Look at both long and short term, as mentioned above. Never make a snap decision in the stock market. Even if you can only spare 5 or 10 minutes to step back and think about your next step, your decisions will be much better because of it.

3. Keep a Fallback Position in Mind

You probably won't always act on them, but having a fallback position in mind at all times is a good failsafe. A fallback position is an alternative plan you keep in mind in case something doesn't work out with the original plan. To use the above example of buying stock in an auto company, your fallback might be to also buy stock in oil if oil prices are rising and predicted to continue. That way, even if your auto stock goes down in value, you have a fallback for the time being as well as your long-term auto investments on hand.

Having your fallback position thought out doesn't mean you're necessarily going to act on it. Often, the original plan will still turn out to be the best one. Remember not to panic and to think things through. However, you can proceed with more confidence knowing that your fallback plan is in place.

4. Be a Trend Follower

There are a few times when it can make sense to go against the popular investments and strategies of the time. However, more often, going with the trends is the best choice. If a particular stock is suddenly very popular, there's likely to be a good reason for that. And if a stock starts losing value, it's smart to wait until it levels off before doing anything with it, even if your instinct makes it seem like it's the time to sell.

Stock market knowledge has been tested by time in many different situations. For most investors, being a trendsetter is not a smart choice. Follow the crowd - but do your own research to make smart decisions too.

5. Quality Over Quantity

Stock market investing is less about crunching numbers than you might think. What you really need are good qualitative skills so you can interpret how events and information will affect the stock market. Whether it's a press release, a political change that could affect prices, or public comments from company management, you need to know how to interpret information and see how it could affect your portfolio.

From CEO resignations to word choice during interviews, there are both large and subtle hints as to what direction things are heading. Although you don't want to make decisions based on guesswork, you can rationally interpret this kind of information to help you make better-informed decisions.

Final Thoughts on Thinking Like a Stock Market Analyst

Learning to think like a stock market analyst doesn't require a new college degree, lots of calculations, or even a whole lot of market know-how. Although it's good to do your research and learn as much as possible about how the market works, just changing the way you think about and approach your investments can have huge payoffs.

The best analysts keep near term factors in mind, as well as the long term. They never act when in a panicked state of mind, because they always have a fallback position on deck. They also pay close attention to what's going on in the world of investing and the world outside of it. Learning to interpret how different factors can affect the market is one of the most important things you can do for your portfolio.

Ready to take the next steps? We can help you get the financial data you need to get started - find out more.