Stock selection is a very complicated process and investors have different approaches. However, it is advisable to follow general steps to minimize investment risk. This article will explain these basic steps for choosing high-performing titles.
Step 1. Decide on the time frame and overall investment strategy. This step is very important because it will determine the type of stocks you buy.
Suppose you decide to be a long-term investor, you would like to find stocks that have sustainable competitive advantages along with stable growth. The key to finding these stocks is looking at the historical performance of each stock over the past decades and doing a simple S.W.O.T. (Strength-weakness-opportunity-threat) in the company.
If you decide to be a short-term investor, you would like to adhere to one of the following strategies:
to. Momentum Trading. This strategy involves looking for stocks that have increased in both price and volume in the recent past. Most of the technical analysis supports this trading strategy. My advice on this strategy is to look for stocks that have shown steady and steady price increases. The idea is that when stocks are not volatile, you can simply ride the uptrend until the trend breaks.
second. Contrary strategy. This strategy consists of looking for exaggerated reactions in the stock market. Research shows that the stock market is not always efficient, which means that prices do not always accurately represent the values of stocks. When a company announces bad news, people panic and the price often falls below the fair value of the stock. To decide whether a stock has overreacted to the news, you should consider bouncing back from the shock of the bad news. For example, if the stock falls 20% after the company loses a lawsuit that does not have permanent damage to the company’s brand and product, you can be sure that the market has overreacted. My advice on this strategy is to find a list of stocks that have recent price drops, analyze the potential for a reversal (via candle analysis). If the stocks show candlestick reversal patterns, I will analyze recent news to analyze the causes of recent price drops to determine the existence of oversold opportunities.
Step 2. Conduct research that provides a stock selection that is consistent with the investment strategy and time frame. There are numerous action filters on the web that can help you find actions based on your needs.
Step 3. Once you have a list of stocks to buy, you need to diversify them to get the best reward / risk ratio. One way to do this is to run a Markowitz analysis for your portfolio. The analysis will give you the proportions of money to allocate to each action. This step is critical because diversification is one of the free lunches in the investment world.
These three steps should help you begin your quest to consistently make money on the stock market. They will deepen your knowledge of the financial markets and give you a sense of confidence that will help you make better business decisions.