How To Pick Stocks

Picking the right stocks is as easy as 1-2-3 – correct? If you do the right things at the right time with the right intention, then yes. So let’s put the puzzle together, talking about picking stocks and using the best stock picking services like Mindful Trader or traditional stock market research.

One of the main reasons for investing in the stock market is that your income limits your capital growth potential. The only way to create true wealth with unlimited upside potential is to purchase stakes in companies that work around the clock instead of you to maximize their profit while you sleep.

Learning how to pick stocks is a critical component of this process, and it can mean the difference between financial disaster and generational wealth. In life, only smart work is rewarded; hard work is not.

how to pick stocks

Identify Your Goals

In the beginning, knowing why you decided to start investing will put you in one of the three categories of investors. Of course, these can overlap or change with time.

Capital growth can be your investment goal without substantial funds for investing and many active years ahead.

At some point, you might want to create a passive income to rely on either for early or regular retirement or to supplement your income. As a passive income-oriented investor, you can create a portfolio that pays you regular dividends.

Substantial capital, either grown over years or a sudden inheritance, calls for an investing strategy of wealth preservation.

Invest In The Stock Market

What are the best stocks to invest in right now? It is essential to compare stocks and the companies you want to invest in before adding them to your portfolio. It needs some experience before you see success in the long run. That’s normal, and all other young investors start the way you do.

If you are undecided about investing in the stock market, you should start with a paper trading account first. A paper trading account helps you find the right strategy and type of investment. Then, if you like, you can try to trade like Warren Buffett by taking a look at his portfolio.

Trading Warren Buffett stocks on paper is a good idea. This way, you learn how to pick stocks to buy without risk attached. Then, once you know how to pick stocks the right way, and once your strategy is ready for real money investments, you can proceed with a real brokerage account.

1. Fundamental Analysis

When choosing stocks, investors typically combine fundamental and technical analysis. Fundamental analysis seeks a ‘correct’ rather than a ‘good’ price for a stock. It determines the true value of a company by examining its financial stability and profitability.

The most important fundamentals to look for are a company’s earnings history, EPS (earning per share) growth. Their debt-to-equity ratio should be similar to or lower than industry standards. The price to earning (P/E) ratio shows the market’s sentiment on the company’s intrinsic value. The total liabilities, whether they have great management, and the global outlook of their industry are also crucial metrics.

Some alternative edges beyond a company’s balance sheet that indicate future results are its ability to create long-term value in other areas, its ability to adapt to evolving economic and market changes, and the human capital it employs.

How To Find Companies?

When you first decide to pick stocks and start investing in the stock market, chances are you don’t have extensive knowledge of various sectors. Heavy players, like Warren Buffet, suggest starting with index funds, mutual funds, and ETFs.

Then, it’s time to establish a basic knowledge of the market you already have a competitive advantage on, such as the field of your employment or you are interested in. You should only invest in what you know and understand.

Also, there are useful sites you can turn to, such as Trade Ideas, Seeking Alpha, Stock Rover, Benzinga Pro, and many more. Some use supercomputers, quantum computing, or algorithms, and machine learning AI to help you make the best of your investments.

Narrowing down on a specific industry and analyzing the major players, their competition, and small, upcoming, promising companies is a great way to find your first stock. Digging deeper, getting a grip on the industry’s future, its place in the economy in the long run, and having an eye to potentially disrupting changes can make or break your portfolio.

Cheap Stocks

Riskier instruments have their places in a balanced portfolio and can help you grow capital. Picking stocks of a young company can be a good deal because a stock’s current price doesn’t necessarily indicate company value. Look beyond the price to the company itself. Then judge if what you’re buying for that price is worth it or not.

Penny stocks offer potential life-changing high profits, with a low price point of entry, but are much more volatile. Research the company and identify potential catalysts for a future breakout.

Growth Stocks

Growth stocks are great to counter inflation, build wealth and anticipate to show superior future performance, well above market levels. The right stocks for growth investors have a high P/E ratio, smaller market capitalization, outstanding earnings growth, and have plenty of future growth potential.

Instead of paying dividends to shareholders, these companies reinvest their earnings in their growth. However, growth investments tend to be speculative and expensive at current stock prices. So, it might be good to only assign a minimal budget for such stocks by using fractional shares investing offered by multiple brokerages.

Individual stock growth can come from unexpected places, not just the market environment but also from unique future prospects.

For instance, Uber, in addition to its intrinsic value, has data as a valuable future position. They have information on where everyone goes and what services they use. That’s difficult to capitalize on right now. Still, once autonomous driving and taxis become a reality in a few years, they’ll be able to team up with Cruise, Waymo, and AutoX to run the services side of the economy the way Amazon does retail. Having these visions for a company can be the source of long term future growth.

Dividend Investing

You can create a passive income stream by investing in dividend-paying stocks. Picking the right stock means there is steady market value growth in the stock, as well as a high dividend yield.

You should select stocks based on long-term stability, consistent earnings growth potential, a low debt-to-equity ratio, consistent historical dividend growth. Also, diversify between high-yielding, high-risk stocks and moderate-yielding, lower-risk stocks.

Dividends can help offset the growth downturn in markets, and supplement your income, even in your active years. To grow a strong dividend portfolio, you should reinvest your dividend payments in the beginning to buy more shares.

Find The Best Dividend Stocks

It is easy to find the best dividend stocks to buy now. In the first step, you have to evaluate the current dividends on each particular company paid to the shareowner. There are various stock screeners available that help you to compare relevant data points like:

  • EPS
  • Dividend in $
  • Dividend Date
  • Market Cap
  • P/E

for free. A paid stock screener might provide an even more beneficial result. This depends a bit on your personal needs and budget.

Value Investing

Value investing is a long term strategy that involves picking individual stocks in a good company at a discount to their true value. It is designed to capitalize on some temporary inconsistency in market pricing.

To keep their emotions out of the equation, value investors use a system of thorough analysis to determine how large of a position they are comfortable holding in a company. Aside from providing good value, these businesses must have a long-term competitive edge over their competitors.

Short-term market volatility is irrelevant in value investing; the key is to trust your system rather than trying to time the stock market. Value investors typically look for things like a low P/E ratio, steady growth revenue, and cash flow increase in recent years, earnings growth, a low debt to equity ratio.

2. Technical Analysis

Investors can choose potential stocks using fundamental analysis and further narrow that down with technical analysis. Technical analysis is not a bible on how to pick stocks, and many professionals in the finance industry are hesitant to only apply these techniques for predicting future growth based on past performance.

However, some aspects of technical analysis are widely accepted, such as trend lines, support and resistance levels, RSI (Relative Strength Index) for entry and exit points, candle patterns, price by volume, Fibonacci retracement, and Moving Averages.

When you scan charts, understanding some aspects of the underlying market is crucial to make use of the information it provides. For example, a trading indicator like the RSI doesn’t always work in any market environment. That’s why investors often use backtest engines to see how an indicator worked in the past, where the strengths and weaknesses are.

Trading

Choosing a stock and company to invest in is difficult enough for long-term investors, let alone traders. Trading, whether day trading or swing trading, is one of the riskier ways to profit from fluctuations in a company’s stock price.

To give you a sense of how hard it is, 80% of day traders fail in their first year, and the metrics are more doomed over time. Eventually, approximately 5% succeed in the long run in stock trading on an intraday time frame.

The numbers don’t lie, and swing trading is far less risky than day trading, according to science. Whatever you choose to do, volatility is a trader’s friend, and that is how you will make money. You must find the instruments that best suit your trading strategy and risk management on any given trading day.

The most profitable traders focus on a few, or even one stock, that they know in and out, with all the support and resistance levels, and trade the same thing many times.

3. Copy Others

Taking investment advice from strangers for your stock picks is generally a bad idea. However, observing and slightly copying what other successful investors are doing can go a long way.

There are more ways to do this. One is checking politicians’ portfolios. Senate Stock Watcher is an excellent resource for learning about how Senators invest in the stock exchange. There are many great moves there historically that, if replicated, could have made you a lot of money, especially with options.

The other option is to use brokers that allow copy trading. This way, you can replicate the most successful investors’ portfolios based on your budget and preferences. Even if you don’t copy everything, it’s good to have more ideas on hand. There are many more sources similar to these. With some research, you can find the most famous investors’ portfolios.

4. Unusual Strategies To Pick Stocks

Aside from the obvious or widely available strategies for selecting the best stock of profitable companies, some emerging alternatives are to consider.

One method is to look for unusual trading volume and educate yourself on how to interpret it, such as increased options activity, analyst upgrades or downgrades, or insider news.

Another is to only invest in companies whose services or products you use regularly. As you already trust their services and know them, these companies can provide a more appropriate and secure investment strategy.

Using Google Trends, trending search terms, and future trend forecasting services can also lead you to an intriguing selection of other stocks that you would not have discovered otherwise. These hot topics can predict future revenue growth and a brisk sales season for a company that invests in them.

Guide

What Is a Stock?

To get a share of ownership of a particular company, you buy their shares. All shares have a ticker symbol. Apple Inc., for example, has the ticker symbol AAPL. Some people also call it a stock symbol. To buy a share, the company has to be listed on a stock exchange.

NASDAQ and NYSE are the most popular ones in the United States. Once you bought a share, you bought a percentage of ownership of the chosen company. Now comes the fun part. Three terms describe it correctly if you own shares from a public traded company:

  • Stockholder
  • Stakeholder
  • Shareholder

More often than not, people are talking about buying and selling individual stocks. But they mean buying and selling shares of stock. If you enter the position in the order form of your brokerage account, then you enter the number of individual shares. You can buy $20,000 of stock of a company, but 500 shares of a company.

What Stocks To Pick In a Bear Market?

In a bull market, everyone is a genius until they aren’t anymore, according to seasoned investors. That is, investing in current soaring stock moves and reaping incredible profits is far easier than trading stocks in a bear market and reaping consistent results.

To begin, never chase uptrends in a bear market and never attempt to forecast the bottom of any stock. Instead, buy stocks based on holding companies with low debt and high cash. Diversify as much as possible. In high-inflation environments, many commodities, such as gold tend to outperform stock prices.

During bear markets, investors such as Warren Buffet made fortunes by gradually buying stocks all the way down and patiently waiting them out while holding more cash.

Why Is Risk Management Important?

Risk management is one of the most important aspects of investing. There are several aspects and tools to it.

First of all, diversification. Diversify between sectors and instruments and develop an investment portfolio with assets to counteract bear and bull markets and rising inflation.

According to statistics, buying ETFs and index funds can outperform any individual stock in the long run. This is also true for actively managed and professionally managed investment portfolios.

You should invest in sectors and companies you understand. On a similar note, emotional errors can wreak havoc on your portfolio. It can be difficult to avoid cognitive biases when researching and evaluating a company. You may unconsciously choose stocks you have already spent a significant amount of time researching to avoid the additional work of restarting it.

What Are The Best Books To Read On Picking Stocks

Do you remember the time being in school? You have read hundreds of books, and you know what? The knowledge you gained from reading brought you to where you are now. Reading books educates me like nothing else. If you want to know how to find the right stocks or how to find the best company to invest in, then reading books helps. That’s because you learn the proper methods.

The world is full of stock recommendations, but you are responsible for comparing stocks, and you have to come up with the right strategy on how to pick penny stocks, FANG stocks, ETFs, or even commodities. I have compiled a list of the best stock trading books. You won’t need every book on the list, but it is an excellent start to buy one and work from there.

If you want to get serious about investing and fine-tune your stock pick strategy read some of these books; How To Make Money in Stocks by William O’Neil or The Interpretation of Financial Statements by Warren Buffet. The Intelligent Investor by Benjamin Graham is one of the most well-known books on investing. You could even say it’s a must-have for smart investment choices.

Future Shock by Alvin and Toffler, The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, and Market Wizards by Jack D Schwager are not real classics but offer unique angles and edges on how to trade stocks and invest.

Does Compounding Make The Difference?

It makes the difference between people who fail and people who succeed. It’s worth nothing to have one home run with an amazing profit in one particular stock if all other investments fail.

The sum of all your investments reveals if you belong to the most successful investors or not. Find good stocks to invest in is an important step at first in your investment career. The second and even more important step is to keep your profits and to compound them over time.

How Does Warren Buffett Pick Stocks?

Warren Buffett is a buy-and-hold investor. When he starts investing in a company, then he often becomes one of the main shareholders. Therefore opening a new position can take weeks or even months. Otherwise, his buy orders would have a major impact on the market.

The same goes for selling, and that’s why his investments are all long term oriented. He just cannot switch them in and out of his portfolio that easily. So if he thinks that a company offers a good return on investment in the long-term, then he starts buying shares. Warren’s investments are based on fundamental data and growth expectations.

What Stocks Does Warren Buffett Own?

It’s easy to replicate Warren Buffett’s portfolio by looking at the positions held in his Berkshire Hathaway portfolio. Currently, 26% of the portfolio is invested in Apple Inc., 12.6% in Bank of America Corporation, and 10.1% in The Coca-Cola Company.

You can easily export the data from CNBC and calculate the portfolio proportions for each position. These numbers are official because Berkshire Hathaway has to send the 13 F filing to the SEC.

Conclusion

As a newcomer investor, you should be realistic about your shortcomings and safely focus on having good long-term results. Even if it sounds boring, a low-cost index fund is sometimes the best option. Also, using investment services and managed portfolios can lift the burden of stock picking off of you.

Most people begin investing because they want to create a consistent source of income that is not dependent on their 9-5 job and to secure their financial future. You can easily achieve that with current stock price levels if you have a diversified portfolio and control your emotions.

Before buying stocks, ask yourself why you want to start investing. This will establish your investment strategy.

About the author: Alexander is the founder of daytradingz.com and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.