Investments - Name of the Trade: Find Your Way in the Capital Markets

The stock and capital markets are intriguing and attractive for many people. Engaging in them bears the dreams of earning significant profits with the ease of simply watching numbers grow. The motto is allegedly simple: buy low, sell high and the difference is entirely yours. It is known that most people view themselves as having a higher-than-average IQ and self-confidence. We all believe that in the moment of truth, we would be able to make wise and correct decisions, and profitably manage our money in the market. However, in practice, our decisions are easily affected by our thoughts and are biased by them. Emotions like fear, hope or greed have significant influence on the process of decision-making. These emotions may harm us by making us execute wrong decisions that bear losses, or at least lower our gains. In order to cope with the emotional bias, one must build a clear and detailed trading plan. This is the only method to control our decisions and follow them.

This book is intended for people who would like to broaden their knowledge when it comes to capital markets. In the first chapter, we will learn about different approaches to investment management in order to discover our personal tendencies. The second chapter goes into details about the biases and mistakes investors make, their origins and the damage they cause. The third chapter will focus on the principles we must keep in mind when trading in order to bring maximum profit potential to our earnings. The fourth chapter will describe what investment routes exist and which tools we can use. Afterwards we will discuss an efficient dispersion of the investment portfolio and the guidelines in determining the distribution between the various routes. We will learn how a wise distribution can lessen risk and increase potential gains.

In Chapter 6, which speaks about measuring performance of investments, you will be able to find an explanation about the different rating methods, their advantages, disadvantages and limitations. You will also find a suggestion for a possible performance measurement model that overcomes some of the issues. Then you will learn how to properly compare different types of investments to their benchmarks. When investing in stocks, one must compare its performance to the relevant index. It may very well be that the performance is excellent despite the fact that there is a loss. However, in alternative investments, whose goal is to make profits in any market condition, the measurement is comparative to zero or to the risk-free interest rate. A performance higher than the interest rate is a good result, while a loss in the long run or a lower gain than the interest rate is considered a bad performance. It is clear that when comparing the performance of bonds or stocks to their benchmarks and also when comparing alternative investments to the risk-free interest rate, one must calculate the risk taken as well. This will be further elaborated in the chapter.

The second part of the book is intended for whoever wants to be involved in making investment decisions themselves. It begins with how to properly predict returns via technical analysis and how to understand which forces act beneath the surface by looking at the price graphs. In the next chapter (Chapter 8) you will learn about building an organized trading plan, which assists in coping with the difficulties of decision-making and provides a tool for constant improvement. In this chapter, examples of various trading plans are given, some based on financial data while others based on technical analysis. They say a real mistake is a mistake done twice, and trading plans prevent us from repeating mistakes. A trading plan is a tool that enables our decision-making process to be accurate, makes the calculation of the ratio between profits and risk possible, measures the probability of success or failure, and as such, greatly improves our chances to gain.