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 crucial because it will determine the type of shares you buy.
Suppose you want to become a long-term investor; you will want to find stable growth and sustainable competitive advantages. 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. (Strengths-weakness-opportunity-threat) analysis on the company.
If you decide to be a short-term investor, 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. The 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 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 stock's values. When a company announces bad news, people get nervous, and the price often goes below the fair value of the store. To decide if a stock has reacted to the report, you should see the possibility of recovering from the effects 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 with a recent drop in prices and analyze the potential for repatriation (via candlestick analysis). If stocks exhibit a candlestick reversal pattern, So I will go through the recent news to explore the reasons for the current price decline to determine the existence of recent selling 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 stores 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 most excellent reward/risk ratio. One way to do this is to do a Markowitz analysis for your portfolio. The study will provide you with the percentage of the money you should allocate to each stock. This step is essential because diversification is one of the free lunches in the world of investment.
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.