So, you’ve made the decision to begin investing, and you want to jump ahead to the part where you do everything on a professional level.
Who can blame you? Let’s get to the part where you are living in a mansion and stuff, right?
Well, here at I’m a stock trader, we can’t promise you millions of dollars or a big house on the hill. No one can do that, in fact.
But what we can do is try to teach you a path to understanding the trading world a little better, because actually understanding what you are doing will go a long way towards making you better at anything, right?
Let’s Start with the BASICS
You already know that a company with a lot of cash on its balance sheet is superior to one with debt on its balance sheet, that a low P/E ratio is typically better than a high P/E ratio, and that analyst recommendations should always be taken with a grain of salt. You are also aware of the guiding principle of the wise investor: A portfolio ought to be diversified among several industries.
Whether or not you’ve waded through the more challenging ideas of technical analysis, that pretty much covers the fundamentals. You’re prepared to choose stocks.
But hold on! How do you pick a few stocks that are worthwhile to buy out of the tens of thousands of options available? No matter what some experts in the field say, you can’t look at every balance sheet to find businesses that have a good net debt position and are growing their net margins.
Smart Stock Pickers Share these Three Key Characteristics:
- They are determined to stick with their plan because they have already decided what they want their portfolios to accomplish.
- They keep up with the daily news, trends, and events that affect every business in the economy.
- When they decide whether to buy or sell stocks, they consider these objectives and other information.
Identify Your Objectives and Set Goals
The first step in choosing investments is to decide what your portfolio’s goals are. Everyone invests with the intention of making money, but different investors may be more concerned with capital growth, wealth preservation, or providing a supplement to their income during retirement.
These objectives each call for a very distinct approach for each person, and there is no “one size fits all” way of doing things, especially when it comes to investing. So, always make those decisions based of your personal savings, income, and long-term vision.
There are MANY Different Kinds of Investors
- Income-Oriented Investors place a strong emphasis on purchasing (and holding) stocks in businesses that consistently offer competitive dividends. These are frequently reliable but slow-growing businesses in industries like utilities. High-rated bonds, real estate investment trusts (REITs), and master limited partnerships are additional choices.
- Investors Looking to NOT Lose Their Wealth: Due to their nature or their situation, investors who seek to preserve their wealth have a low risk tolerance. They favor making investments in dependable blue-chip companies. They may focus on companies that thrive in both good and bad economic times, such as consumer staples. Initial Public Offerings are not pursued by them (IPOs).
- Investors Who are Looking for Capital Appreciation: Stocks of businesses in their best early growth years are what investors seeking capital appreciation are looking for. For the potential of significant gains, they are more willing to accept a higher level of risk.
Portfolio Diversification
Any of the aforementioned investor types may mix and match the aforementioned tactics. That’s actually one of the main reasons for diversification. Growth stocks can make up a small portion of a conservative investor’s portfolio. A more risk-taking investor should set aside a portion for dependable blue-chip stocks to cover any losses.
The simple part is deciding which category you belong to. It becomes difficult to choose which stocks to invest in.
Pay Attention to the World Around YOU
Keeping up with market news and opinions is essential. Passive research includes reading industry blogs written by authors whose opinions you are interested in and following the financial news. An investment thesis can be built upon a news article or blog post.
A rational observation can serve as the foundation of the argument. You might observe, for instance, that the emerging market countries are creating new middle classes, which are made up of people who have a higher demand for a wider range of consumer goods. Because of this, there will be more demand for certain goods and commodities.
Taking the argument one step further, the investor can see that an increase in demand will help some producers of the product.
This kind of fundamental analysis tells the “story” behind the investment, which is what makes it worth it to buy a stock.
Nevertheless, it’s crucial to question your own presumptions and theories. You might enjoy doughnuts and fast cars, but that doesn’t mean Southeast Asia’s newly wealthy do as well.
Once you’ve done this kind of qualitative research and are sure of your general thesis, you can do more research in corporate press releases and investor presentation reports.
Discover Your Companies Through Hard Work
Finding companies is the next step in the stock-picking procedure. Three easy methods are available:
Check out the stocks that the exchange-traded funds (ETFs) that track the performance of the sector that interests you are investing in. It only takes a few clicks to find “Industry X ETF” online. The top holdings of the fund are listed on the official ETF page.
Use a screener to find stocks that meet certain criteria, such as sector and industry. Users of screeners have access to extra features like the ability to sort businesses according to market capitalization, dividend yield, and other helpful investment metrics.
Look for news and commentary on companies in the investment niche you have chosen by searching the blogosphere, stock analysis articles, and financial news releases. Remember to evaluate everything you read critically and consider both sides of the issue.
Although these three approaches are by no means the only ones, they do provide a simple place to start. Each strategy has distinct benefits and drawbacks that investors should take into account.
Although it takes time, consulting news sources for expert opinions can be fruitful. Your knowledge of the fundamentals of the industry will grow as a result. Also, it might let you know about interesting small businesses that screeners or ETF holdings don’t find.
Watch Corporate Presentations (we know..they can be BORING)
It’s time to focus on investor presentations once you’ve determined that the industry you’re interested in is a wise investment and are familiar with the key players. Even though they aren’t as detailed as financial statements, 10-Q and 10-K reports give a general idea of how businesses make money and are easier to understand.
These reports will also include information about the future outlook for the business and its sector. You can narrow your search by looking through presentations and company websites.
The process involves a more thorough look at a company to see if it could do better than its competitors in the industry.
So What Do You Do Next?
You might have a list of ten or more companies or a single investment prospect at the end of your research process.
You might also decide that this field is not a good fit for you. It’s alright. You might not have made a bad investment if not for all that research.
The art of stock picking requires an understanding of when to say no. You might be prepared to make the purchase, or you might decide to act like a seasoned financial industry expert and perform a thorough financial statement analysis.
Can You Get Rich Picking Stocks?
Probably not, but you might be able to make a few bucks.
Picking stocks, also referred to as “active investment management,” frequently underperforms a passive strategy that follows the major stock market indices. In fact, studies reveal that over a 15-year period, over 90% of stock pickers underperform and many lose money.
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