Choosing a good stock is a very complicated process as investors have different perspectives. However, it is wise to follow simple steps to reduce investment risk. This article will further outline these basic steps for choosing high-performing stocks.
Step-1 Decide on the investment time frame and general strategy. This step is significant as it will determine the type of shares you will buy.
Assuming you decide to become a long-term investor, you'll want to find stocks that have steady growth as well as lasting competitive advantages. The key to finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple S.W.O.T business. (Strenght-Weakness-Opportunity-Threat) and analyze the company.
If you decide to become a short-term investor, you would want to follow one of the following strategies:
(a) Momentum Trading:- This strategy is to look for stocks that have increased in both price and volume in the recent past. The most technical analysis supports this trading strategy. My advice to this strategy is to look for stocks that have demonstrated a steady and smooth rise in their prices. The idea is that when stocks are not volatile, you can ride the up-trend untill the trend breaks.
Research suggests that the stock market is not always efficient, meaning that prices do not always accurately represent the value of stocks. (b) Contradiction Strategy:- This strategy is to see the reactions coming in the stock market. When a company announces bad news, people panic, and the price often drops below the fair value of the stock. To determine whether a stock has overreacted to a piece of news, you should look at the likelihood of recovering from the effects of bad news. For example, if the stock falls 20% after the company loses its legal case, causing no lasting damage to its brand and product, you can be confident that the market overreacted. My advice to this strategy is to find a list of stocks that have recently declined in price, analyze the reversal potential. If stocks exhibit candlestick reversal patterns, I will go through the recent news to analyze the reasons for the recent price drop to determine the existence of overbought opportunities.
Step-2 Conduct good research that gives you a selection of stocks that suit your investment time frame and strategy. There are many stocks screeners on the web that can help you find stocks as per 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 to do a Markowitz analysis for your portfolio. The analysis will give you the proportion of funds allocated for each stock. This step is important because diversification is one of the free lunches in the investing world.
With these three steps, you should start your quest to earn money consistently in the stock market. They will deepen your knowledge of the financial markets and provide a sense of confidence that will help you make better trading decisions.
You must be logged in to post a comment.