Hi I have the following case that is relevant to all stock traders: An event happens (new product announcement, release of rating of product quality) that impacts a firm's stock price and leads to abnormal returns. However, this event only impacts the value of the operating business, but not the firm's non-operating business (e.g., excess cash) and its debt. How do you trade different stocks with DIFFERENT amounts of non-operating business and debt (relative to their operating business) when they are all subject to the same event? Stocks with HIGH debt should go up/down MORE than those with LOW debt, right (leverage effect)? Please let me know your thoughts/trading behavior. THX
Right, more leverage should equal more volatility. Your question on how to trade short term events, assuming you are already familiar with the fundamentals, could come down to adding some technical analysis to the mix. Watch CNBC during Fast Money or any segment there, all those guys on the desk who manage millions will constantly call out the levels on the charts they are watching. Short term moves are based on supply and demand, understanding how to read that off a chart will be important if you are trying to trade shorter term moves. Some basics about there here http://stockaholics.net/threads/teach-me-technical-analysis.125/
Thanks Gil, this is very insightful. When you are trading, do you differentiate between events/new information that impact ONLY the operating business VS. those that lead to a re-evaluation of all value components of the firm (i.e, operating business, AND non-operating assets AND debt)?
The more active you are as a trader, the less you care about fundamentals, you are simply looking at momentum on the chart. You can show me 100 reasons why AMZN should be a $40 stock right now, but look now as at it hits $614 at the moment ahead of earnings.
