Choosing stocks to trade is often a daunting task for many prospective traders. The task is further complicated by the amount of time and energy needed to browse through the several stocks listed in courses such as the New York Stock Exchange. Faced with this challenging task, here are five steps that traders can use to select the best stocks to buy.
1. Carry Out Market Assessment
The direction in which the broader market is moving is a critical factor for selecting a stock. Often, as research has shown, nearly 75% of the stock follows the broader market trajectory. Like how rising sea tides lift all boats, stocks also rise with the rising market trend, increasing the chances of finding a good stock.
Besides market trends, it is essential to consider the moving average of major indexes. These are important as they provide a glimpse of the general price trends within given periods. For instance, if the intended trade period is two months, a 50-day S&P 500 moving average could be used to assess the general price trend over the said previous period. Regular follow-up of market-moving events is also important as such could influence market direction, including the company announcing its earnings.
2. Stock Screening
Screening for stocks might perhaps be the most difficult task. It involves looking at and identifying the specific stocks of interest. A variety of tools such as screener tools used by Schwab clients can be utilized to filter stocks based on factors including sector, the price performance of the stock in the market, and rating.
When selecting the most likely candidates, one can use the growth value of the prospective stocks as a method to filter stocks. Undervalued stocks refer to those stocks whose current trading prices are below the fair value.
Technical analysis or fundamental metrics can be used as the basis for undertaking this process. Undervalued stocks present a goldmine since they have definite room for growth. Several factors could indicate undervalued stock:
- A stock where the company is stronger financially than other companies, but whose stock is trading at prices below that of the latter companies
- A stock where the company has apparent potential that is not captured in the price of its stock
3. Select a Particular Sector
Different sectors of the economy hold different promises of growth. Some sectors are generally considered high growth while some are not. Upon successful identification of potential stocks, the next step calls for mapping the identified stocks to their respective sectors to have a general outlook of how the industry is performing.
The Global Industry Classification Standard, GICS, are 11 defined sectors that can be used to investigate the per sector performance. Stocks in sectors whose future outlook is grim can be forgone for stocks in sectors indicating strong potential growth in the future. Besides, it is also of significant importance to consider the short-term outlook of each sector. Various sources such as the Sector Views printed biweekly by Schwab provide this information.
4. Review Fundamental Details
With an established shortlist of viable stock candidates, a thorough review of the detail about the stock is carried out. Check for any information, more particular, expert commentary about the company. Consider the presence of information such as product recall or existing lawsuits that are red flags with the potential to affect stock prices. Also, consider positive information such as future product launches or takeovers that are a precursor to future growth in stock prices.
Other crucial information one should review includes company ratings and financial performance. This step aims to obtain as much information as possible about each company that could help identify the best stock.
5. Check Performance Chart
At this stage, the list has been whittled down to the only most promising candidates. Now is the time to look at how each stock is currently performing by looking into the trend line. The trend line provides a glimpse as to whether it is the appropriate time to buy the stock. Often, people buy when the price of the stock is rising or when the price has significantly dropped.
Once you are done with your first buy, you will get used to these steps in the subsequent purchases. However, regardless of the methodology followed to purchase the stock, one key point is to ensure that one’s expectations and reasoning for partaking in every trade are well tracked.