How to Choose Stocks to Invest In
The biggest obstacle every trader faces is the question of how to accurately choose stocks to invest in. Obviously, accurately analyzing a stock is a key component of successful trading, but the question is extremely difficult to answer. Choosing stocks is part science, part art, and what most traders don’t like to admit, part intuition.
Choosing the right stock is actually only part of the equation. The other part is choosing the right stock for you. Traders have differing investment styles, philosophies, risk tolerances, financial goals, etc. A stock that’s a good choice for your portfolio might not be a good choice for another trader. So before trying to choose the right stock, you first need to choose the right investment style.
Choosing an Investment Style
The first step in choosing an investment style is to know yourself and your personality. Are you likely to grow impatient if you don’t see immediate results, or are you willing to bide your time for the right opportunity? How much of a drop in the stock price are you willing to endure before you’ll sell it? Are you looking for the big score, or are you willing to take small profits as they present themselves?
The second step is to know your investment goals and time horizon. Are you investing to build up a nest egg for a retirement date that is still decades away, or are you investing for a goal that is only a couple of years away? Are you trying to earn some extra income, or do you need this money to live on? Are you trying to amass a lot of wealth, or are you just trying to add to what you already have?
Matching Your Investment Style to an Analysis Style
There are two basic types of stock analysis, technical analysis and fundamental analysis. Technical analysis is charting. The idea is to learn how to read charts so you can spot trends in the market, as well as potential turning points. Fundamental analysis is researching the company itself. With fundamental analysis, you will examine the company’s financial reports and analyze their ratios. You’ll also consider industry competition and growth potential before making an investment.
Typically speaking, traders with a shorter-term focus use technical analysis and traders with a longer-term focus use fundamental analysis. There is no right or wrong way to do your analysis. Some traders use both. They will conduct fundamental analysis first to see if they like the company itself, and then use technical analysis to determine the right time to buy the stock. The key is to match the analysis style to your investment style and apply it consistently.
Putting it All Together
Once you’ve determined the appropriate investment style and analysis style for your personal goals and needs, you need to roll up your sleeves and get to work. There are several high quality financial web sites, such as Yahoo Finance and Google Finance, which will allow you to research companies for free. Use those free resources to choose stock to invest in, and start trading. I recommend that you start off with a virtual trading program to test your stock picking skills without putting any of your money at risk. Once you are confident that you plan will work for you, it’s time to start investing.
