Stock picking is a very complex process and investors have different perspectives. However, it is wise to follow common steps to reduce the risk of investment. This article will outline these basic steps to select high performing stocks.
Step 1. Decide on the time frame and general strategy of investment. This step is very important because it will determine the type of shares you buy.
Let's see if you want to make long term investments, then you will want to find stocks that have stable growth as well as sustainable competitive advantage. The key to finding these stocks is by looking at the historical performance of each stock over the past decades and doing a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.
If you want to make a short-term investment, you will want to follow one of the following strategies:
a. Momentum Trading. This strategy is to look for stocks that have increased both in value and volume in recent times. Most technical analysis supports this trading strategy. My advice about this strategy is to look for stocks that have demonstrated steady and smooth growth in their prices. The idea is that when stocks are not volatile, you can only ride the trend until the trend breaks.
B. opposite strategy. This strategy seeks out over-reactions in the stock market. Research suggests that the stock market is not always efficient, meaning that prices do not always accurately represent the values of shares. When a company announces a bad news, people panic and the price often goes below the fair value of the stock. To decide if a stock has been over reacted to a news, you should look into the possibility of recovering from the impact of bad news. For example, if the stock falls 20%, the company loses a legal case in which there is no permanent damage to the business brand and product, then you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have a recent drop in prices, analyze the potential for a repatriation (via candlestick analysis). If stocks exhibit candlestick reversal patterns, I will go through recent news to analyze the causes of recent price declines to determine the existence of recent sell-off opportunities.
Step 2. Conduct research that allows you to select stocks that fit your investment time frame and strategy. There are many stock screeners on the web that can help you find stocks according to your needs.
Step 3. Once you have a list of stocks to buy, you will need to diversify them in a way that gives the greatest reward / risk ratio. One way to do this is a Markowitz analysis for your portfolio. The analysis will give you the proportion of money that you should allocate to each stock. This step is important because diversification is one of the free-lunches in the investment world.
To make consistent money in the stock market, you should start these three steps in your quest. They will deepen your knowledge about financial markets, and provide a sense of trust that helps you make better business decisions.
You must be logged in to post a comment.