One of the hardest tasks you may ever face is choosing winning stocks in the stock market. As an investor, you may find it tough to figure the winning stocks out of thousands of publicly traded stocks. Even large brokerage firm finds it hard to determine the best stocks for them or their clients.
Today we’re living in the era of personal computers and the internet. This has truly opened up the floodgate of the database to help you access massive amounts of financial data that was hard to find a decade ago. Just a click of your mouse can pull out the massive financial data of your chosen companies. What all you need is to sort this data out for your stock analysis purposes. The same approach can be used for picking suitable bonds or mutual funds. You’ll be able to find many stocks screening tools freely available on many financial websites. Even though many stock market investors get their stock investment ideas or tips from the untrusting sources which eventually are designed to swindle their money.
Now, What Are The Untrusting Sources In Stock Market?
Chances are you might get your stock investment ideas from any of the three basic sources:
#1 You may get recommendations from your stock broker, family members, or friends;
#2 You get involved in buying by merely liking a company’s products or services based on your past personal experiences and
# 3 You might have read online articles or media reports about any positive development of the company on your watch-list. And then end up finding a great stock by using one of these methods. But there are high chances that your stocks thus selected will be a loser going forward.
Buying stocks based on a tip gotten from a broker, friends or family members are usually may not be a smart move. The information or tips thus you get from these sources can be questionable or any of them may have a hidden agenda. Moreover, the rationale thus given to buy these stocks is usually not research-based. The tips providers are seldom given the follow-ups and give you an exit strategy or tell you when to sell your stocks. In fact, research articles you usually find are biased or not necessarily from independent sources. I seldom give a stock recommendation to any of my friends or family members to avoid any future conflict.
Actually, many of them believe that the stock market game is sort of a gambling and thus like to stay away from investing in stocks. Some of them prefer to invest in mutual funds. I terribly fail to make them understand that investing in stocks is like investing in businesses.What all you need to understand here is to take the stock investing as your business having a long-term perspective. If you truly want to get the compounding effect in your investing journey, stock investing is an excellent choice. Here you need to be very selective in choosing fundamentally good stocks after analyzing them properly and understanding their underlying business models.
And if you are a short to medium term investor/trader or truly a day trader in the stock market, understanding some sort of technical analysis is an added advantage or an edge. Technical analysis helps you understand for taking the calculative risk for getting the better risk-reward ratio in the stock market.
Coming to the main point, for understanding the real game, you need to understand that the hotter the stocks tip is, the more speculative it is likely to be. You might have bought your stocks on tips that you have gotten from these three sources where they assure you to double or triple your money within a certain period of time. And I am sorry to say, that day will never come. In fact, there can be a bigger probability that you could lose most of your investment.
An investor’s golden rule is that for achieving large benchmark-beating returns, you need to accept the risk greater than the market. Believe me, there is no free lunch. Perhaps, your stock broker supports you in many ways by providing you the needed information and helping you in your trade. But at the same time, they may also have a vested financial interest in giving you the recommendation on the specific stocks. After all, they make money from commissions when you buy stocks based one of their recommendations through them.
And the second reason is that many investors usually choose their stocks based on their familiarity with their companies. You might have formed a conviction that if you use and like a company’s products or services, others would like them, too. The real problem is that oftentimes many investors come to a decisive conclusion without analyzing the current financials and competitiveness of the company.
The products or services of such a company might have a great value and a tremendous deal for you, but that may not generate much profit for the company. That particular product you like could be a big money maker for you but might contribute only a small fraction to the company’s revenues. Even good companies with several successful products may not make good stocks. Many a times it was observed that good companies might have a very expensive stock valuation as compared to what they can expect to earn.
And the third main way some investors select and buy their stocks on the basis of media reporting a positive news development for a company. The funny thing is that besides you, many other investors are getting the same information. And by the time the information is pass to the marketplace, there is a good chance that the stock may have moved already and not allow the investor to get a favorable price. The good news about the stocks tends to already reflect in the stock price. The stock market is usually very efficient in discounting any breaking news event into the price of a stock.
Why Most of the Investors are Rely on These Sources?
The prime reasons why most people rely on these three methods for picking their stocks are the inherent habit, lack of proper knowledge or self-confidence to do it in a better way. The stock tips you get from your three main resources or stock-picking ideas based on your past experience may not take into account several other factors such as your risk tolerance, proper money management, a good profitable system, and time frame. Even if you do, you need to be extra careful and compare a stock with some of its peers and learn as much about the company as you can. In these days, myriad of financial tools are available at little or no cost that makes the comparison easy. Unfortunately, a lot of people don’t bother to give more thought or do research to safeguard their life’s savings.
Why Stock Screening Is So Important In The Stock Market?
Stock screening or stock filtering is an important process of finding quality stocks that meet certain criteria. For instance, you may find a stock with a market cap of above five billion dollars, a forward P/E ratio below 15, and a 3% dividend yield. As you start adding more criteria, the more refined and desirable output is likely to come out. You may implement a famous approach that is the Top-Down method in stock selection. This method helps you analyze the market from the big picture all the way down to individual stocks.
This is entirely different from the Bottom-up approach. In the Top-down approach, you start screening fundamentally pretty good stocks with the help of a stock screener. With adding more stringent criteria in your stock screener, you would be able to drop fundamentally weaker stocks. Once you have your screening results, you can refine your outcome by further scrutiny and judgment on your part and that you can achieve on your own. It would be a better option if you analyze your stocks that you get from your brokerage firm or an independent financial research company.
One thing you can do is to open the price chart of that stock on the weekly time frame. And then try to understand the overall trend of that stock-whether it is in up-trend or down-trend stage. Find the major support areas of the price chart (say 200 DMA) of your chosen stock to trigger a buy order. This way you can buy stocks of your choice as low as possible.