Posted on April 26, 2019
Stock picking is both art and science and to master the technique of choosing the best stocks takes decades of patience and practice.
Patience is fundamental for an investor in the stock market. Each and every investment decision should be supported by reliable and strong research recommendations.
However, when one begins their investment journey, one does not have to be an expert in buying stocks. An investor can learn the nuances in stock trading over time. However, careful research about stocks is required before investing. There are financial advisors and experts who can advise an investor on how to pick the best stocks
There are many articles, reports and books on how to choose good stocks. An investor can read these to get a clear understanding of the various criteria that have to be taken into consideration while stock picking.
Guide to stock picking for investing
For an investor, the most crucial step in buying stocks is to put their hard-earned money in the right place. If an investor does not allocate proper time for this step, he/she is bound to face losses. So how to choose a stock to invest? An investor should know the fundamental aspects such as the nature of their business, their operations, balance sheet, etc. Have a clear picture of the company’s financial position before buying its share. This can be obtained by reading the research reports of the companies. Understand the company’s future plans, projects, etc. and analyse if the business would remain sustainable in the future.
1) Assess the company carefully when buying its stocks:
Company's management: Company's management plays an important role in a company’s growth and future prospects. Learn about the key promoters of a company and find out their management practices. In the recent past, multiple companies have lost their reputation due to poor management.
Company's business: An investor should be well aware of the company’s business model before investing. It is important to understand the nature of the business whether cyclical or non-cyclical, nature and end use of the products and services, markets it is serving, industry in which it is operating etc. This basic knowledge will help the investor to stay informed about the company.
2) Study historical data of the stock:
Technical charts provide a fair idea about stock price movements that can be used to know how the stock has performed over a span of time. By using both technical and fundamental views of a particular stock, an investor can arrive at a conclusion about a stock.
3) Avoid buying stocks based on rumours:
Emotions and sentiments should not be the deciding factors while buying stocks. Do not take any investment decision based on rumours.
4) Understand the risk profile:
While investing in a stock, protecting their capital and minimizing risk should be an investor's priority. An investor should know clearly how much money he/she could afford to lose. All the investment decisions have to be supported by research. Have a clear idea on how to pick stocks for the long term. An investor's risk profile also plays a major role in selecting a company, as there are three categories of companies such as large cap, mid cap and small cap based on their market capitalisation.
If an investor is averse to risk, then he/she can invest in large-cap companies; as these companies are already well established, the risk one may face in investing in these companies would be less.
An aggressive investor can invest in small-cap companies; these companies are like the start-ups which may become successful or they may even go in a loss altogether. Hence, the risk involved is high in the case of investing in these stocks.
Essential tip for day trading:
What is day trading and how to select stocks for day trading?
Day trading or intraday trading is the act of buying and selling shares within the same day or even multiple times over the course of a day. An investor has to select those stocks that have high liquidity. It is not advisable for an investor to buy highly volatile stocks. Conduct thorough research before buying stocks.
Conclusion
Hope this article painted a clear picture on how to pick stocks for trading and investment purposes.
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