Which stocks you trade is going to depend on a number of issues, including your level of experience, how much capital you have available, and what style of trading you are doing. Whether you are trying to find the best stock for day trading, or you prefer other styles like swing trading, position trading or investing, your criteria for how to pick stocks should be written down as part of a trading plan. Your trading plan is dynamic, and, thus, will evolve as you continue to learn and uncover your strengths and weaknesses.
Here are a few things to consider before you pick stocks:
- Understand your level of risk and decide what is appropriate.
- No Matter your personality, develop a smart strategy for choosing stocks to invest in.
- Start by picking one stock and then analyze the results.
- Use trading charts to understand movement of stocks and the overall market.
- Finally, stick with your plan.
Determine Your Goals
The first step to picking investments is determining the purpose of your portfolio. Everyone’s purpose for investing is to make money, but investors may be focused on generating an income supplement during retirement, on preserving their wealth, or on capital appreciation.
Three Types of Investors
Income oriented investors focus on buying stocks in companies that pay good dividends regularly. These tend to be solid but low-growth companies in sectors such as utilities. Other options include highly-rated bonds, real estate investment trusts Investors who aim at wealth preservation have a low tolerance for risk, by nature or because of their circumstances. They prefer to invest in stable blue-chip corporations. They might zero in on consumer staples, the companies that do well in good times and bad. They do not chase initial public offerings.Investors who are looking for capital appreciation are looking for the stocks of companies that are in their best early growth years. They are willing to take a higher degree of risk for the chance of big gains.
The Diversified Portfolio
Any of these investor types might use a combination of the above strategies. In fact, that’s one of the prime motives of diversification. A conservative investor can devote a small portion of a portfolio to growth stocks. A more aggressive investor should earmark a percentage for solid blue-chip stocks to offset any losses.
Control your anxiety.
One should keep one’s anxiety in check while chasing stocks for rumour and speculative news. Do not rush to buy a stock based on such buzz without properly checking the valuation for such new developments, Chokkalingam added. Once the trade is executed, it cannot be reversed for the mistake made on valuation. It is better to let go the “opportunity”, which seems to have been created by rumour and speculations, rather than burn your savings, he tells.
The stock-picking process involves identifying companies. There are three simple ways to do it.
- Find the exchange-traded funds which track the performance of the industry that interests you and check out the stocks they’re investing in. This is as easy as searching for “Industry X ETF.” The official ETF page will disclose the fund’s top holdings.
- Use a screener to filter stocks based on specific criteria, such as sector and industry. Screeners offer users additional features such as the ability to sort companies based on market cap, dividend yield, and other useful investment metrics.
- Search the blogosphere, stock analysis articles, and financial news releases for news and commentary on companies in the investment space you’ve targeted. Remember, be critical of everything you read and analyze both sides of the argument.
