Investors choose one stock over another for many reasons, though they are all related to making money.
There is no magic key or rule for picking winning stocks. Even the best investors often miss the target. No-One, even the smartest and most popular investors, is always right. However, with careful analysis and an observant market eye, you can increase your winning percentage.
Selecting stocks with various options available can be a challenge for the average investor. While the objectives of every individual can change their investment framework, a clear set of rules can help. Check the instructions below to have a better idea on how to pick a stock:
Set Investment Goals
When it comes to the stock market, there are various reasons for investment. Some people are looking for wealth to make a life change in the long term, such as retirement or a college fund for their children. Some look for a stream of income to provide enough money to spend. Some of them want to speculate on potentially large profits, while others want to preserve their money. It all depends on the person’s needs and preferences.
Generally, income and growth are the two opposite ends of the investment spectrum. Investors in income favor slowly growing, stable and dividend-paying enterprises. Those who are more likely concerned with the capital reservation prefer investing in blue-chip companies. On the other hand, investors in growth tend to target high-priced stocks, which have reliable growth rates and great potential.
Your investment goals depend heavily on your life situation. A growth strategy may be more suitable if you are a young adult who wants to save money for retirement or pay down on your first home. When you are a retired person looking for cash to add to your income, it would be better for you to choose reliable dividend stocks.
Alternatively, it is essential to keep your portfolio well-diversified by using a combination of the different investment strategies. It is quite easy to choose the category that suits your needs. However, it gets trickier and more challenging when it comes to stock-picking. For every investor, having a basic strategy helps with narrowing down the search before starting to analyze companies’ finances.
Stay Well-informed About the Current Stock Market
It is very crucial to keep an eye of the current stock market opinions and events. Regularly check the magazines, blogs, and online financial news to acquire more knowledge and become expert in the business. Sometimes, you will get informed about the foundation of an underlying investment thesis in a blog post or a news article.
When navigating the internet and looking for the current news of the stock market, you will find a vast level of convenience about the different opinions and analyses through different perspectives regarding the various current events in the stock market. Occasionally, the underlying argument might be as simple as “An increased number of people are crossing the border into middle-class status due to the current situation of emerging markets by moving away from poverty. Thus, there will be a remarkable demand for commodity/product X” Taking this underlying argument in consideration, it is highly expectable that the producers of X will certainly prosper.
Following this fundamental analysis, you will have a better idea about the general story behind every investment and decide whether you are ready for the stock-picking or not. Additionally, once you are done with performing this qualitative research and feeling convinced, you better opt for investor representations and press releases to have a further and more in-depth analysis
Searching for the Right Companies
Here are three easy ways to help you find the right companies of your interest:
- Look for the ETFs of the specific industry to have a better idea about its performance, and then check their holdings. You can search for “Industry X ETFs”; you will get access to all or the top holdings of the funds.
- To filter stocks depending on certain criteria, such as industry and sector, you can use a screener. You will get additional features, like dividend yield, sorting companies by market cap, and other helpful metrics of the stock market investment.
- Stock analysis articles, blogosphere, and financial news will give you extra information and ideas about any company and industry. Make sure to check and analyze every aspect of the argument and be critical of everything you find on the internet.
Among the searching methods listed above, using the ETF holdings approach is most likely the quickest way to narrow down your search. Nevertheless, when looking for ETFs, you will often ignore small cap and micro corporations as they tend to hold blue ship companies on top of the list. On the other hand, screeners offer an extensive list of securities of various companies from all over the world, but the investment metrics are often fairly confusing and misleading. Alternatively, you will get a lot of advantages and have more precise ideas about the current status of every company when you look for the professionals’ advice.
To become a shareholder in a large, international company undoubtedly sounds lucrative. Nevertheless, smaller companies also merit your attention simply because their stock can increase at any time. Such rises can load a lot of money on owners. Set up a list of companies you find interesting (or for any other reason) and look up all the information you can find on every company thoroughly. Be particularly careful when studying reports on income and pay extra attention to achievements as well as a critical failure. An investor should understand how the company handles unpredictable problems and what happens with its share price during these situations. It helps to assess the risks from the beginning, especially when you are new in the stock market investment business.
Look Up for Corporate Presentations
Once you decided which company or companies you want to invest in and you have a clear idea about their current state, your next step is to corporate presentations. Presentations are much easier to comprehend than the 10-K and 10-Q reports, and they deliver an overall indication of how the companies make their money. Besides, with the corporate presentations, you will have a better idea about the anticipated direction of a firm and its business. So, make sure to look up the companies’ sites and presentations to further enhance your search.
When looking up for an investor presentation, you find the necessary information about cash flow statement/ income statement/ balance sheet performance, future growth opportunities, operational highlights, and an overall overview of the industry.
The company’s arrangements and plans influence your investment directly. If the company releases a new product successfully or makes an interesting discovery, it can be great for your potential profit. However, innovation generates interest, which is not always linked to success and high profit. New management, for example, may have a negative or positive impact on stock prices. You need to eliminate the idea of fast-paced surges. The majority of heavyweight businesses grow progressively, but steadily.
It is easier than you think to obtain a stable revenue from stock investment, so do not let the multi-layered procedure disorient and confuse you. All the above steps are intended to facilitate your stock-picking process, not make it harder. You will need time and persistence to adopt a practical approach to stock investments. Just remember that whatever you do is meant to reduce investment risk and increase your profit you.