Stock Picking is a difficult process, and different techniques are taken by different investors. However, it is prudent to take general precautions in order to reduce the risk associated with the investments. These fundamental principles for selecting high-performing stocks will be discussed in detail in this article.
Three Steps to Successful Stock Picking
Step 1: Establish a time range for the investment and a broad plan for the investment. This step is critical since it will determine which kind of equities you will be able to purchase.
If you decide to be a long-term investor, you would want to look for stocks that have long-term competitive advantages as well as consistent growth in their dividend yield. Identifying these stocks requires an examination of each stock’s historical performance over the course of several decades, as well as a simple business S.W.O.T. (Strengths-Weaknesses-Opportunities-Threats) study of the firm in question.
In the event that you decide to become a short-term investor, you should adopt one of the following strategies:
a. Trading on the ebb and flow of the market.
The goal of this approach is to find stocks that have had a rise in both price and volume in the recent past. The majority of technical studies are in favor of this trading technique. My recommendation for this approach is to seek for stocks that have shown a consistent and steady increase in their share prices. This strategy assumes that, when the stock market is calm and not turbulent, you may just ride an uptrend until the trend is broken.
b. The Contrarian Approach.
The goal of this technique is to identify overreactions in the financial markets. According to research, the stock market is not always efficient, which implies that the prices of stocks do not always correctly reflect the values of the underlying assets. Because of the fear that occurs when a firm reveals negative news, the stock’s price frequently falls below its true worth. When determining if a stock has overreacted to a piece of news, you should consider the likelihood of the stock recovering from the negative impact of the news. For example, if a company’s stock declines 20 percent after losing a court lawsuit that has no long-term impact on the company’s reputation or product, you may be certain that the market overreacted to the news. My recommendation for this approach is to compile a list of equities that have seen recent price declines, and then assess the likelihood of a price turnaround (through candlestick analysis). If the stocks exhibit candlestick reversal patterns, I will review the most recent news to discover the reasons for the recent price reductions and whether or not there are any oversold chances.
To proceed to Step 2, you must do research that results in a list of stocks that are compatible with your investing time frame and approach. There are several stock picking screeners available on the internet that may assist you in finding stocks that meet your requirements.
Following the creation of a list of stocks to purchase, you would need to diversify them in a way that provides the best reward/risk ratio possible. Step 3: One method of accomplishing this is to run a Markowitz analysis on your portfolio’s holdings. The results of the analysis will tell you what quantities of money you should put into each stock. This step is critical since diversity is considered to be one of the financial world’s “free lunches.”
These three steps should be plenty to get you started on your quest to regularly make money in the financial markets. They will enhance your understanding of the financial markets, and they will instill a sense of confidence in you that will allow you to make better trading judgments in future.