BetterInvesting urges investors to educate themselves about the stock market so they can make informed decisions about stock purchases. Investors should conduct their own review and analysis of any company of interest using the Stock Selection Guide before making an investment decision.
BetterInvesting provides unbiased, in-depth investing education and powerful online stock analysis tools to create successful lifelong investors. BetterInvesting staff, along with a dedicated community of volunteers across America, teach the organization's principles and time-tested methodology to individuals and investment clubs.
For more information about BetterInvesting, please visit www. Reading the financial news and keeping up with industry blogs by writers whose views interest you is a form of passive research. A news article or blog post can form the foundation of an investment thesis. The underlying argument can be a common-sense observation. For example, you might note that the emerging markets nations are producing new middle classes made up of people who demand a greater variety of consumer goods.
As a result, there will be a surge in demand for certain products and commodities. The "Story" Behind a Stock Pick The thoughtful investor has a 'story' that explains every decision to purchase a stock Taking the argument a step further, the investor can deduce that with an increase in the demand for a product, some producers of that product will prosper.
This type of basic analysis forms the "story" behind the investment, which justifies purchasing a stock. At the same time, it's important to be critical of your own assumptions and theories. You may love doughnuts and fast cars, but that doesn't mean that the newly affluent of Southeast Asia are clamoring for them too. Once you are comfortable and convinced of the general argument after performing this form of qualitative research, corporate press releases and investor presentation reports are a good place for continued analysis.
Find Your Companies The next stage in the stock-picking process involves identifying companies. There are three simple ways to do it: Find the exchange-traded funds ETFs which track the performance of the industry that interests you and check out the stocks they're investing in.
Use a screener to filter stocks based on specific criteria, such as sector and industry. Screeners offer users additional features such as the ability to sort companies based on market cap, dividend yield, and other useful investment metrics. Search the blogosphere, stock analysis articles, and financial news releases for news and commentary on companies in the investment space you've targeted.
Remember, be critical of everything you read and analyze both sides of the argument. These three methods are by no means the only ways to pick a company, but they do offer an easy starting point. There are also clear advantages and disadvantages associated with each strategy that investors should consider.
Seeking out expert opinions via news sources is time-consuming but it can yield results. It will deepen your understanding of the industry fundamentals. It also may alert you to interesting smaller companies that don't turn up on screeners or within ETF holdings. Tune-in to Corporate Presentations Once you are convinced that the industry that interests you is a solid investment and you are familiar with the major players, it is time to turn your attention to investor presentations.
They are less comprehensive than financial statements , but they provide a general overview of how firms make their money and are easier to absorb than Q and K reports. These reports also will have forward-looking information on the expected direction of the company and its industry. Browsing company websites and presentations help you refine your search. The process involves more in-depth scrutiny of a specific company to see whether it might outperform its competitors in the industry.
The Next Step At the end of your research process, you may be left with a single investment prospect or a list of ten or more companies. Or you may decide that this industry is not right for you. That's fine. All of that research may have stopped you from making a bad investment. Knowing when to say no is an essential aspect of the art of picking stocks.
You may be ready to pull the trigger, or you may act like a financial industry pro and conduct an in-depth financial statement analysis. Is Stock Picking a Successful Strategy? Stock picking, also known as active investment management , tends to regularly underperform a passive strategy that tracks the broader stock market indexes. While there are several candidates for best stock picker of the modern era, Warren Buffett is often heralded as the most prominent.
Trying to pick stocks is often quite difficult because markets tend to be somewhat efficient, especially over longer time periods. The efficient market hypothesis EMH states that market prices reflect all available information, and so there is no way to earn excess returns.
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Every experienced investor will tell you something different, and everyone seems to have their own method of evaluating opportunities. The fact is, there are a lot of ways to look at a stock and plenty of lenses through which to view its potential. However, it boils down to understanding the most-used stock selection criteria and what these metrics mean. Keep in mind, none of these is a standalone metric.
Look for companies with consistent or growing sales and avoid those that seem to have sporadic or declining sales. This is definitely one that should be on your list of best stock selection criteria. Strong profit margins also tend to mean more reliable cash flow. However, debt can also be a necessary evil that helps a company secure capital to finance growth.
The key is balance. Companies that perform well and appreciate their stock price are companies worth investing in. Keep reading to learn more about the top stock selection criteria. Companies with strong ROE typically do a better job of putting investment dollars to work and thus, are able to return more to shareholders as a result. Using this figure, you can look at the current share price and determine how far from the average it is.
Additionally, this is a useful metric for smoothing out volatility to show a true price trend for the stock. But wait! With tens of thousands of stocks to choose from, how do you go about selecting a few worth buying? Whatever some experts suggest, it's just not possible to comb through every balance sheet to identify companies that have a favorable net debt position and are improving their net margins.
Key Takeaways Decide what you want your portfolio to achieve, and stick with it. Pick an industry that interests you, and explore the news and trends that drive it from day to day. Identify the company or companies that lead the industry and zero in on the numbers. Note that stock picking as a strategy often underperforms passive indexing, especially over longer time horizons. They stay aware of the daily news, trends, and events that drive the economy and every company in it. They use those goals and knowledge to inform the decisions they make to buy or sell stocks.
Determine Your Goals The first step to picking investments is determining the purpose of your portfolio. Everyone's purpose for investing is to make money, but investors may be focused on generating an income supplement during retirement, on preserving their wealth, or on capital appreciation.
Each of these goals requires a very different strategy. These tend to be solid but low-growth companies in sectors such as utilities. Other options include highly-rated bonds , real estate investment trusts REITs , and master limited partnerships. Investors who aim at wealth preservation have a low tolerance for risk, by nature or because of their circumstances.
They prefer to invest in stable blue-chip corporations. They might zero in on consumer staples, the companies that do well in good times and bad. They do not chase initial public offerings IPOs. Investors who are looking for capital appreciation are looking for the stocks of companies that are in their best early growth years. They are willing to take a higher degree of risk for the chance of big gains.
The Diversified Portfolio Any of these investor types might use a combination of the above strategies. In fact, that's one of the prime motives for diversification. A conservative investor can devote a small portion of a portfolio to growth stocks. A more aggressive investor should earmark a percentage for solid blue-chip stocks to offset any losses. Deciding which category you fall under is the easy part. Figuring out which stocks to pick gets complicated.
A stock screener , if you use one, is prone to error. Riding the coattails of institutional investors is an option, but you should know that they tend to rely on safe blue-chip stocks that may or may not provide the best returns. Keep Your Eyes Open It's vital to keep up with market news and opinions.
Reading the financial news and keeping up with industry blogs by writers whose views interest you is a form of passive research. A news article or blog post can form the foundation of an investment thesis. The underlying argument can be a common-sense observation.
For example, you might note that the emerging markets nations are producing new middle classes made up of people who demand a greater variety of consumer goods. As a result, there will be a surge in demand for certain products and commodities. The "Story" Behind a Stock Pick The thoughtful investor has a 'story' that explains every decision to purchase a stock Taking the argument a step further, the investor can deduce that with an increase in the demand for a product, some producers of that product will prosper.
This type of basic analysis forms the "story" behind the investment, which justifies purchasing a stock. At the same time, it's important to be critical of your own assumptions and theories.
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