In the financial markets, investors often trade in response to the same piece of public information. Investors who are proficient at "beating the gun" are able to buy or sell a security more quickly than other investors once a new piece of information about an investment surfaces. Subsequently, the trader or investor who was able to time the markets the best is positioned to earn the greatest profit from the trade. Beating the gun may be performed successfully in response to sophisticated technical analysis or just by fast and accurate responses to market data.
Investing does not always refer to taking a long position on a stock, which is to invest with the expectation that a stock's market value will increase, and neither does the practice of beating the gun. Both investing and beating the gun could also be associated with shorting a stock, or taking a financial position that will profit an investor if a stock price falls. Professional traders including hedge funds often use short trades in the financial markets. In the event negative information surrounding a certain security emerges, a trader could be successful at beating the gun with a short trade.
The more traditional strategy for beating the gun is to buy or sell stocks at the earliest possible point after new details surrounding an investment's potential become available. This behavior is often more practical for professional investors because they have extremely fast and efficient trading equipment at their fingertips. The average investor is likely to find the practice of beating the rest of the markets more difficult.
Investors who perform a bottom-up investment strategy are essentially attempting to beat the rest of the markets to a trade, or beat the gun. This approach is centered on making investment decisions based solely on information surrounding the financial security rather than considering market or economic conditions. By focusing on the merits of a company's financial health, an investor could theoretically uncover a winning stock or exit a doomed security before others recognize the same potential.
There are some market trends that investors may use to attempt to capitalize on early and essentially beat the gun on certain trades. A common market phenomenon is called "the January effect." Under this premise, stock prices tend to rise at the start of a New Year. Investors who attempted to beat the gun on this theory could position themselves to profit by selling stocks before other traders attempt to capitalize on this trend act and push market values lower. This particular approach lost some of its effectiveness because the trading strategy became quite widespread, according to a Princeton University report.