If you are into stock trading or you have been fascinated by stock investment, it is important to note that understanding the basics of picking winning stocks is crucial to becoming a successful investor. It is not enough to buy stocks, and just hope for the best; you need to do more than just that. You need to develop a strategy for picking the right stocks to increase your wins.
You are never going to pick a stock without first understanding the market at that time. You may need to research different companies, analyze their financials, and understand how the market works to pick winning stocks.
In this guide, we will go over some basic step-by-step tips on identifying great winning opportunities in the stock market. But first, what is the stock market?
What is the Stock Market?
The stock market is the free market where investors buy and sell shares of publicly-owned companies. It’s a set of exchanges where companies issue shares and other securities to the general public. These shares or securities are what we refer to as “stock”.
When you purchase a public company’s stock, you’re purchasing a small piece of that company and you thereafter share in the company’s profits or losses. The idea of buying stocks is the same fundamental idea behind other financial investments like forex, crypto, and in this case, stock trading – analysis-based speculation of value.
In other words, when buying stocks, you speculate and pick stocks you think will appreciate in value in the next few months to years. After the value of the stock or share has risen, the investor can then sell his shares to make a profit. The decision to sell or buy lies fully with the investor but knowing when to buy requires a thorough knowledge of the market to pick winning stocks.
Guide to picking winning stocks to buy
Selecting stocks to invest in requires some important tips that new investors need to know. Here are some of the major tips for picking winning stocks from today.
1. Get familiar with the market
If you are just starting out as an investor, the stock market can be very intimidating. You may get scared of taking risks because you are not familiar with the market. However, the process of picking winning stocks is not as difficult as you might think, and putting in the time and effort can make stock trading very rewarding in the long run.
You want to be familiar with the market. You want to know what is happening, and the things that are driving the prices of public stocks. Being familiar with the market will not only give you a confidence boost but will also help you make informed choices about which stocks to invest in and which ones to avoid.
One way you can get familiar with the market is by reading news, books, and blogs about the industry you are interested. You are also encouraged to do online research to check out recommendations by professional analysts about particular companies in your industry of interest.
2. Know your risk tolerance
Knowing your risk tolerance entails answering the question ‘How much risk can I bear?’ This will help you determine the best way to allocate your money to avoid making impulsive investment decisions. Before you start picking stocks, it is important you have a clear idea of what you hope to achieve and how much risk you are willing to take on.
Risk tolerance is individual-based, and not just a matter of who is braver than who. It is dependent on several factors like age, income level, number of dependents, debt load, and so on.
For example, a high-income earner bearing a significantly huge debt load would have a lower risk tolerance than someone with fewer obligations even if the latter is earning less than the former. Bearing all these in mind will be helpful in determining your risk tolerance and help you pick stocks that align with your growing portfolio.
Your financial goals can also determine your risk tolerance. Usually, the higher the risk level, the higher the potential gains or losses. But in the case of a loss, you need to be sure you are staking an amount you are able to handle without tilting your portfolio into a downward spiral that is very hard to recover from.
Your risk tolerance, therefore, enables you to rebalance your portfolio in the case of any loss, while you get a better understanding of your investment strategy. And once you have determined your investment goals and risk tolerance, you can start to find stocks that align with your strategy.
3. Determine your investment goals
Before starting to pick stocks, it’s important to know what your investing goals are. Are you looking to build a diversified portfolio? Or are you a short-term momentum investor?
Having clear investing goals will help you narrow down the 8,400-plus stock options in the market to the ones that make sense for your specific investment objectives. Having a set of goals will help you eliminate stocks that are out of the question for your investing style.
Once you have a list of companies you want to invest in, start by researching each of them. This will allow you to understand their business and competitive advantage. It will also give you a sense of the financial health of the company.
You can start by reading their annual reports and reviewing their financial statements. This will give you a better understanding of their financial performance and whether they are a good investment.
Some companies also publish financial results on their websites. These will be updated frequently, and are often accompanied by press releases from management. This will give you a comprehensive overview of a company’s performance and can help you identify any opportunities or risks that you may be overlooking.
When you’ve done this, it’s time to whittle your list down to the best candidates. This will include only those companies that you understand, which have a competitive advantage in their industry, and that you believe have the potential to do well.
4. Make a list of available stocks in your industry
Based on your risk tolerance and findings from your research, you can begin to make a list of several companies in your chosen industry. From this list, you would then pick a definitive company to buy shares.
Several investors use different approaches in selecting companies to pick stocks. These can be done by using the stock’s valuation, or technical analysis.
Parameters used in estimating a company’s stock value include the price-to-earning (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, and dividend yield. These ratios can help you determine the value of a stock compared to others.
The P/E ratio is a measure of how much you are paying for a company’s earnings per share. A stock with a low P/E ratio and a high dividend yield means you would earn much more than you are paying. This is a share worth investing in.
Technical analysis involves the use of charts representing past price movements and trends to identify future trading opportunities. Technical analysts believe that past trading activity and price changes are valuable indicators of growth potential, financial stability, profitability, or otherwise.
There are numerous books and materials that teach stock valuation methods and technical analysis. Consult them in addition to what you see here. These will help you make a viable list of relevant stocks and also help you choose from the list you have made. Picking a winning stock definitely pays off in the shortest possible time, and it is worth the effort.
5. Diversify
Diversification is the process of spreading your risks and portfolio in more than one company or industry. It is the direct application of the phrase ‘Do not put your eggs in one basket’. The stock market fluctuates upwards and downwards for several reasons. This is what we referred to as volatility. Reasons for this volatility are several factors, often external to the companies involved.
Just to repeat, diversification involves spreading your investment portfolio with stocks from different companies and sectors. For example, companies A and B are in the banking sector, and companies B and C are in technology. Diversification is seen when you invest either both in companies A and B or in companies A and C, in any combination.
Internal factors like management, leadership decisions, reputation, and so on, can also affect a company’s valuation, pointing out that the stock market can be extremely volatile and it is not uncommon to see your portfolio fluctuate. Fortunately, diversification can help mitigate the risk.
6. Make an investment plan
As a new investor, it is crucial to understand how to pick winning stocks. The process takes time, careful understanding, and effort but it pays off in the end if you are consistent. It is important to have a long-term plan while focusing on value. This means you should find companies that are priced below their true worth and this is easy to determine if you focus on the inherent value of the company.
Another thing to include in your investment plan is investing in dividend stocks. Dividend stocks are shares that pay a portion of their profits to shareholders. These are one of the best ways to get more out of your investment as they allow you to earn profits from your holdings, and you can increase the size of your holding at any time. Investing in dividend stocks is a great way to build long-term wealth from stock trading particularly if the company’s value continues to stay in the up-trend.
On the nitty-gritty of identifying a company’s inherent and potential future value, understanding the company’s internal operations, trend of financial statements, and news releases can help you evaluate its stock price. You can then plug these into your stock evaluation and technical analysis as discussed before. Screener is a website that helps you calculate useful metrics like market cap, dividend yield, P/E, etc, and helps you filter stocks by specific criteria.
Lastly, it is important to know that investing in the stock market requires patience and discipline. Avoid getting caught up in short-term market fluctuation and avoid the temptation to make impulsive decisions based on emotions. Rather, stick to your strategy and keep a long-term perspective while gradually developing your portfolio.
Final words
Picking winning stocks is both an art and a science. It is an art because it requires patience, perseverance, and discipline. It is a science because through research, practice, and developing the right strategies based on the right resources, you can become proficient and successful in your stock trading venture.
Using the tips described in this post will keep you on top of your trading game keeping in mind that stocks are a risky business. Another thing I didn’t mention is that you can leverage the experience of those above you. This underlies the importance of building relationships with more experienced stock investors as you move ahead in your stock trading journey.
Very finally, you should be able to pick winning stocks in no time if you follow these tips. Also, reinforce your knowledge with information from other sources like Investopedia. Remember that picking winning stocks and succeeding in trading stock is long-term and whatever you experience today will add to your knowledge for future success.
