Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments.
Step 1. Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy.
The key for finding for example long term stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.
If you decide to be a short term investor, you would like to adhere to one of the following strategies:
a. Momentum Trading. Most technical analyses support this trading strategy of purchasing stocks increasing in price and volume. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks.
b. Contrarian Strategy. This strategy is to look for over-reactions in the stock market. When a company announces a bad news, people panic and price often drops below the stock’s fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the business’s brand and product, you can be confident that the market over-reacted.If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities.
Step 2. Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs.
Step 3. Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio.One way to do this is conduct a Markowitz analysis for your portfolio. An analysis step as this is crucial because diversification is one of the free-lunches in the investment world.
These three steps will deepen your knowledge about the financial markets, and would provide a sense of confidence that helps you to make better trading decisions.
More resources and information at Day Trading Basics | How To Day Trade | Home Based Business Grants