How to Pick the Right Stocks – Introduction,
If you are new to investing in stock, your first question would probably be ‘how to pick the right stock?” “How do I make sense of all the information to guide make the right decision?” What are some of the criteria smart investors look at when picking stocks? Does certain criteria and information weigh more than others when deciding on which stock to pick? In this article we will discuss some of the factors that affect a company stock performance and what you can do about it.
Company performance. What are some of the factors that affect a company performance that could have a direct impact on its stock price performance? There is much information that you can derive from analyzing a company financial report. These include the company sales revenue performance, profitability, cash flow, debt, etc.
However, these are not the only indicators of how the company will perform in the future. How capable is the company leadership and overall team? Does it have strong R&D capable of creating market ‘killer’ products or services to ensure its competitive advantage? These are some intangible information that are not easily available especially to a retail investor. It is the combination of tangible and intangible information that make stock picking highly subjective.
Human emotion. The stock market is highly volatile and the movement of the stock price and the index is very much driven by human emotion i.e. fear and greed. Sometimes it does not matter even if your analysis is completely accurate the stock price may head south. There seem to have no logical explanation.
Human emotion is one of the biggest factors causing market mood swing. As such, there is no one single formula to determine the best stock to pick. The best thing to do is to apply the various theories and use that as the guides to determine if you are making the right decision. The better prepared you are the better your chance of picking the right stock.
By now you would have realised the importance of how to pick the right stock. Choosing the right stock will expand your wealth exponentially. Take for example, a single share of Coke purchased for $40 in 1919 would have netted you over $5 million (with dividend reinvested). Similarly, $10,000 invested in Wal-Mart during its IPO will make you a profit of $10 million today.
Fundamental analysis is one of the most commonly used method to pick stock correctly. It looks at the company revenues, earnings, future growth, return on equity, profit margins and other data to determine a company future potential and underlying value.
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How to Pick the Right Stock Picking System,
Just like there are thousands of stocks to pick, there are hundreds of stock picking systems. And more are being created all of the time.
But just like most stocks, most of them are not worth your time.
This article will tell you what is wrong with most stock picking systems and what to look for in a system that works. There are basically three fundamental mistakes that need to be avoided.
1) Choosing a system that is too narrow.
2) Choosing a system that is too broad.
3) Choosing a system that is too inflexible.
Mistake #1: Picking a System that is too narrow
Some systems will base their entire strategy on just technical indicators, multi-day candlestick patterns, or some form of divergence. The problem is that all of these systems are only using two factors: price and volume.
Imagine if you were about to invest in a horse that competed in racing. Would you be satisfied with only the weight and speed of the horse? No matter how you graphed those two variables, they are only two criteria. You should also be interested in the breed of the animal, the competition it was racing against, the jockey’s qualifications, and the horse’s age, to name just a few important details.
Most stock systems do not factor in anything but price movement and volume. These systems do not screen for overall market conditions, industry type, company specifics such as profitability, and much more. You need to take in the factors that matters as we investing is more than finding a magical pattern that you hope will be like Midas’s touch. Finding the right stock and timing your buy and sells takes expertise and common sense.
Mistake #2: Picking a System that is too broad
A stock system should not be too broad in its scope. Many well intentioned professionals give vague tips and broad guidelines to follow. Why? Most are afraid of being wrong. You cannot be right all the time but this is exactly what they may try to do. By giving too many choices they always leave themselves a back-door to rationalize, after the fact, that they were still right.
You need to covers many areas, but also recognize the need to give precise signals to buy and sell. Is it right all the time? Of course not, but you also do not need to be to make amazing gains. You merely need to know the secret of riding the profits as long as possible while minimizing your losses and cutting them short.
At the end of the day you want an expert opinion that is clear and precise. That is what you get if you find a system that is neither too narrow nor too broad.
Mistake #3: Picking System that is too inflexible
Most stock picking systems available now come as plug-ins to an automated piece of software. While helping to automate the process it also takes the power away from you as the investor. What happens when the market changes? Does your rigid piece of software change with it? Will you be able to detect what variables have changed and alter them to keep your profitable streak or will you keep hoping while it drains your account?
As well, all investors are different. Your system should be able to conform to your ideologies and values and not the other way around.
You need a system that adapts to you. Are you into high reward with higher risk? You can alter this system for making a double-bagger each month while raising your risk levels. Do you prefer to buy and hold winning stocks for a longer period of time and squeeze every last cent from it and only trading a few times per year? Do you prefer to trade the best of the gold stocks, or high tech, or some other industry?
The best system takes the best of the stock market and fits it to your goals, comfort levels, and style.
The Solution is to Ask the Right Questions
When it comes to picking stocks you need a system, and you need a system that avoids the three mistakes. The best option is to find a stock picking system that provides to you the control and precision that you need to win the investment game.
Do some search engine research with the terms “stock picking system” and you will find lots of possibilities. You need to evaluate them by asking the right questions. Make sure you ask if the systems you are looking at provide precision and adaptability. When you find the system that answers those questions, you have found your solution.
Christopher Billows is the publisher of In The Money, the Stock Options Trading Course, a 60 page eBook available at http://www.mandalainvesting.com . The eBook has given hundreds of people the investing edge they need to keep ahead of inflation and taxes..Article Source: http://EzineArticles.com/?expert=Chris_Billows.