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Three Steps To Worthwhile Stock Picking

Comments Off on Three Steps To Worthwhile Stock Picking 19 June 2011

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. This article will outline these basic steps for picking high performance stocks.

Step one. Decide on the time-frame and the general method of the investment. This step is highly important as it will dictate the kind of stocks you purchase.

Suspect you choose to be a long-term financier, you would like to find stocks that have tolerable competitive benefits with stable expansion. The key for finding these stocks is by having a look at the historic performance of each stock over the past decades and do an easy business S.W.O.T. ( Strength-weakness-opportunity-threat ) research on the company.

If you make a decision to be a short term financier, you want to stick to one of the following techniques :

A. Momentum Trading. This tactic is to search for stocks that increase in both price and volume over recent times. Most technical analyses support this trading strategy. My guidance on this plan is to search for stocks that have demonstrated stable and smooth rises in their costs. The idea is that when the stocks aren’t unpredictable, you can simply ride the up-trend till the trend breaks.

B. Contrarian Plan . This plan is to have a look for over-reactions in the exchange. Researches show that market is not unvaryingly efficient, which means costs don’t always meticulously represent the values of the stocks. When a company asserts a bad news, folks panic and price frequently drops below the stock’s fair value. To choose whether a stock over-reacted to a reports, you must glance at the chance of recovery from the impact of the bad news. For instance, if the stock drops twenty percent after the company loses a legal case which has no permanent damages caused to the business’s brand and product, you may be assured the market over-reacted. My information on this plan of action is to discover a list of stocks that have latest drops in costs, investigate the potential for a reversal ( thru candlestick research ). If the stocks demonstrate candlestick reversal patterns, I’ll go thru the most recent stories to investigate the factors behind the present price falls to figure out the existence of over-sold prospects.

Step two. Conduct researches that give you a variety of stocks that’s consistent to your investment timeframe and strategy. There are countless stock screeners on the web that will help you find stocks according to your wishes.

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. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world.

These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a sense of confidence that helps you to make better trading decisions.

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