Stock picking is a very complex process and investors have different perspectives. However, it is wise to follow simple steps to reduce investment risk. This article describes these basic steps in selecting high-performing stocks.
Step 1.
Determine the investment time frame and general strategy. This step is important because it determines the type of stock you want to buy. Suppose you decide to become a long-term investor, you want to find stocks that have consistent growth as well as consistent competitive benefits.
The key to finding these stocks is to look at the historical performance of each stock over the past decades and to see if S.W.O.T. (Strength-Weakness-Opportunity-Threat) Analysis on Company.
If you decide to become a short-term investor, you should follow one of the following strategies:
a. Momentum Trading.
The strategy is to look for stocks that have risen in both price and volume in recent times. Most technical analysis supports this business strategy. My advice regarding this strategy is to look for stocks that have exhibited consistent and smooth growth in their prices. The idea is that when stocks are not volatile, you can simply travel up-trend until the trend breaks.
B. Contradictory strategy.
This strategy is for overreactions in the stock market. Research shows that the stock market is not always effective, meaning that prices do not always accurately represent the value of stocks. When a company announces bad news, people panic and the price often drops below the fair value of the stock. To find out if a stock has overreacted to news, you need to look at the chances of recovering from the effects of bad news. For example, if the stock falls 20% after the company loses its legal case, you can guarantee that the market will overreact unless there is a permanent loss to the brand and product of the business. My advice to this strategy is to find a list of stocks that have recently declined in price and analyze the reversal potential (via candlestick analysis). If the stocks exhibit candlestick reversal patterns, I will examine the recent news to analyze the possible reasons for the recent price decline to determine the presence of overbought possibilities.
Step 2.
Conduct research that will give you a choice of stocks that fit your investment time frame and strategy. There are many stock screeners on the web that can help you find stocks that suit your needs.
Step 3.
If you have a list of stocks to buy, you need to diversify them so that they offer a great reward / risk ratio. One way to do this is to do a Markovitz analysis for your portfolio. The analysis gives you the ratio of funds allocated to each stock. This step is important because diversification is one of the free meals in the investment world.
With these three steps you should start your quest to make steady money in the stock market. They further enhance your knowledge of financial markets and give you the confidence to help you make better business decisions.
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