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Keywords:

stock, stocks, stock picks, stock picking, stock pick, stock analysis, portfolio management


The process of selecting stocks is an extremely difficult one, and different investors take various approaches. Nevertheless, it is prudent to follow general steps in order to reduce the level of risk associated with the investments. This article will outline these fundamental steps for selecting stocks with strong future performance.

Step 1: Determine the scope of the investment and the time frame it will take to reach your goals. This step is extremely significant because it will determine the kinds of stocks that you invest in.

If you were considering becoming a long-term investor, you would want to look for stocks that not only have consistent growth but also maintain a sustainable advantage over their competitors. The most effective method for locating these stocks is to examine the performance of each stock over the course of the past several decades and to conduct a straightforward SWOT analysis (strength, weakness, opportunity, and threat) on the company being invested in.

If you choose to be an investor with a short time horizon, you should stick to one of the following investment strategies:

a. Momentum Trading. During the most recent past, this strategy seeks out stocks that have shown increases not only in price but also in volume. This trading strategy is supported by the majority of technical analyses. When implementing this strategy, my recommendation is to search for stocks with price increases that have been consistent and gradual in the past. When stock prices are relatively stable, it is possible to profit simply by following an upward trend until that trend is interrupted.

b. A Strategy That Goes Against the Norm The aim of this tactic is to monitor the stock market for instances of overreaction. According to the findings of several studies, the stock market is not always efficient. This indicates that stock prices do not always precisely reflect the values of the companies they represent. People tend to freak out if a business discloses unfavorable information, which results in a price that often falls below what the stock is really worth. In order to determine whether or not a stock has overreacted to a piece of news, you should consider the likelihood of the stock recovering from the effects of the negative news. For instance, if a company's stock declines by 20% after it loses a court lawsuit that does not result in long-term harm to the company's reputation or product, you can be certain that the market overreacted and that the market participants behaved irrationally. Find a list of stocks that have seen price decreases in the most recent past, and do research to determine the likelihood of a price increase in those stocks (through candlestick analysis). In the event that the underlying equities exhibit candlestick reversal patterns, I will review the most recent news in order to investigate the factors that led to the most recent price declines and establish whether or not oversold opportunities exist.

Step 2: Carry out research that will provide you with a list of stocks that are suitable for the time range and plan you have established for your investments. You may search for stocks that meet your requirements using one of the many stock screeners that are available on the internet nowadays.

Step 3: Once you have a list of companies to purchase, the next step is to diversify those stocks in a manner that will provide you the most potential gain with the lowest possible risk. One method for doing this is to run a Markowitz analysis on your investment portfolio. Following the study, you will have a better idea of the percentage of your capital that should be invested in each stock. This step is essential due to the fact that diversity is one of the free lunches that can be had in the world of investments.

If you follow these three steps, you should be able to get started on your journey toward making consistent money in the stock market. Your understanding of the financial markets will be enhanced, and you'll gain a feeling of self-assurance that will aid you in making more informed choices about your trading.