How to Select Stocks

Once a would be investor decides to undertake the investing part of the job, the first thing to be familiar with is how to choose the stocks, because not all of them offer of a return. Even while day trading those who finish ahead are those who either have the knack to choose well performing stocks or have approaches they have to use to pick stocks that are either performing well already or that will perform well in the near future. There are two known approaches, the fundamental and the technical approaches. The fundamental approach focuses at the performance of the company, what kind of business it is in, its earnings record, its debt, what kind of management team is in place and based on these findings, as long the price of the stock is attractive, it is possible to decide to own or not to own the stock.

The technical approach is totally different because it does not pay attention to how the company is performing and instead of the fundamentals what are used here are various charts that each individual investor keeps and the investment and the selecting of stocks is made based on that. It is difficult to say which method is the best, although most professional money managers are using charts, which shows that there does not have to be any kind of correlation between what the business is doing in reality and how much it stock sells. Such approach has its advantages and its disadvantages and the recommendation is to mix both.

However, a successful investment venture always starts from studying the earnings of the various companies that the investor is contemplating to invest in. The reason why earning is crucial is simply because that is where it is possible to find out how the company had been performing and any company that does not have a steady earning record will not have the ability to pay dividend. Companies report earnings as a total and as per share amount. They arrive at the per share amount by dividing their total earnings for a given fiscal period by the number of outstanding shares that tells what each share will get. That figure is key since it tells investors whether a company is worth their consideration or not.

Consequently, what to look at is if there had been acceleration or if the stock had been at a standstill. If the earning had been declining that stock is not going to be the best choice, because it had been proven that it is stocks that have a healthy accelerating rate that will perform in the future. The figure to look for is 25% growth on a quarterly earnings and annual earning gain of the same figure for at least the past three years. The Internet has made such a research very easy and most brokerage houses avail this information online.

Another quick way to tell how a stock is performing is to look at the price-to-earring ratio, which is the figure that will be arrived at by dividing the quoted stock price to its annual earning per share. And the advice is to buy stocks that have low P-E ratio because they are not overpriced, but in reality the best performing stocks had been those that had high P-E ratio. The reason for that is most traders use chart to make their buying and selling decision, and such approach might work for the near future, but for the long haul it is always the fundamental approach that has a pay off.

While there, looking at the sales growth, profit margins, and return on equity will give more insight on the performance of the given company, because even if they are all reflected in the company's earning, the pattern of the sales growth and the profit margin tell how they both were garnered; by increasing sales or by decreasing expenses or by getting rid of an existing asset, which is a onetime earning in most cases. At the same time knowing the source of the sales or the customer base tells a lot about the company and things that could go wrong in the future. If a company is a supplier to a hanful of heavyweights, losing a few of them in a given quarter could change the whole earning picture. The profit margins looks at how much profit the company makes from each dollar sales and the higher the figure the better position the company is at in leveraging its business. The return on equity aspect looks at how a company uses the investors money and the kind of return it had been offering, where when it is high, such a company is doing well.

Another aspect to look out for is institutional sponsorship and what it is big institutional investors are responsible for close to 70% of the buying and selling of stocks, and when they decide to buy a particular stock its price will go up because of the created demand. One easy way to spot the movements these heavyweight investors are making is to look at the volume of trade and if it above 50%, something extraordinary has taken place and it will take the price of the stock up with it, which is a good time to sell but not to buy. Each financial publication or a brokerage house website will show which stocks traded most in a given day and it should regularly be checked while keeping tab on the other gauges. There is a sponsorship column on most reports that shows a rating from A to E in most cases, A indicating the stock is owned by the top performing funds, which would mean the stock is a top performer.

The industry the stock belongs into is also important because the stocks of companies that are top performers will always yield a much better return to such an extent that the recommendation is not to invest in stocks that are below 20% of the top performing industries. Another key suggestion by experts that might come handy is to override the myth of buy low and sell high whenever it is necessary, because stocks that are climbing will continue to climb, whereas stocks that are in decline could continue to plummet, which means spotting that fine line is crucial.

When it comes to charts they are helpful in studying patterns in order to understand a particular stock's upward and downward movements and once such a trend is spotted the possibility is it will stick for a long while. What the professional investors worry about more than anything else is when to go in and come out of a stock and that makes a huge difference. Making such decisions could be easy by relying on charts instead of the other gauging methods that were on discussion. Typically, charts comprise of vertical bars that plot the price of a stock for a given period and the short horizontal bars that show the price the stock closed at. By simply looking at a chart it is possible to tell the trend, the demand and supply, and which direction the trend would likely go. Charts avail a good representation if they cover between nine to twelve months. In their own right charts require to be familiar with, which would mean more research is needed to master them and put them to work for any new investor.

The conclusion to be arrived at here is it is always possible to start an investing venture by simply applying the fundamental requirements where after studying companies it is possible to choose those that promise to be top performers. However, charts are useful to know when to go in and to come out of a stock, because, after all, money is made by buying and selling stocks and unless an investor has a good grip of when to take a buying and selling steps it could dampen the whole effort.