The stock market is moving very fast these days, so choosing a stock is a very complicated process and investors have different perspectives. However, it is wise to follow general steps to reduce investment risk. This article will outline these basic steps for choosing high-performing stocks.
Step 1. Decide on the investment time frame and general strategy. This step is very important as it will determine the type of shares you want to buy.
Let's say you decide to become a long-term investor, you will want to find stocks that have steady growth as well as sustainable competitive advantages. The key to finding these stocks is by looking at the historical performance of each stock over the past decades and doing a simple business S.W.O.T. (Strength-Weakness-Opportunity-Threat) Analysis on the company.
If you decide to become a short-term investor, you will want to follow one of the following strategies:
One. Momentum Trading. The strategy is to look for stocks that have increased in both price and volume in the recent past. Most technical analysis supports this trading strategy. My advice to this strategy is to look for stocks that have demonstrated a steady and smooth increase in their prices. The idea is that when stocks are not volatile, you can simply ride the up-trend until the trend breaks.
b. Contradictory strategy. This strategy is to watch for over-reactions in the stock market. Research suggests that the stock market is not always efficient, meaning that prices do not always accurately represent the values of stocks. 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 it 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 the business's brand and product, you can rest assured that the market has overreacted. My advice to this strategy is to find a list of stocks that have recently declined in price, analyze the reversal potential (via candlestick analysis). If stocks exhibit candlestick reversal patterns, I would go through the recent news to analyze the reasons for the recent price drop to determine the existence of overbought opportunities.
Step 2. Conduct research that gives you a selection of stocks that suit your investment time frame and strategy. There are many stock 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 3 you should start your quest to make 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.
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