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How To Pick A Stock

Updated: May 27, 2018

Stock investing is something that has been made out to be far more complicated than it needs to be. There are several guidelines for you on how to pick a stock.

1. Look for Positive Price Momentum Most investors search diligently for companies where some good situation is developing – and rightfully so. They do this by asking brokers, looking for stories in the press, etc. The simplest, best way to assemble a list of potential high performers is to refer to this new 52-week highs list included in just about every financial newspaper. It’s highly advocate that investors begin their stock picking expeditions by referring to this list. Stocks do not appear on it unless there is something in fact really good and tangible happening with the company’s prospects.

2. Diversify Between Industry Groups Because stocks within an industry tend to move more or less in lockstep, make an attempt to diversify your portfolio between at least three industry groups. This will help to reduce some of the risk in your portfolio and having your money spread over several industries. Whether you are investing in stocks, fine art, certificates of deposit, bonds, or whatever, the first rule of investing is to diversify.

3. Beware of Stodgy Stocks When selecting stocks, beware of picking those stocks that move very little whether the market is good or bad. These are generally referred to as defensive stocks because they are held by those wanting to defend themselves against the possibility of a bear market. While there have been times when each of these groups has done very well, for the most part they are a waste of time for those who are willing to take a little more risk in order to make a lot more money. So, it is best to exclude defensive stocks, at least from the aggressive portion of your portfolio.

4. Weed Out Takeover Situations People will generally recommend that you look over recent news items around a company before you make a final decision to buy its stock. Some of the stocks on the new-highs list are stocks of companies which are involved in real or rumored merger or buyout situations. They are generally a small minority of the stocks on the new-highs list, but be aware that this possibility exists.

5. Check Out the Chart There are two primary methods used to analyze securities and make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company’s financial statements to determine the fair value of the business, while technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements.Technical analysis boils down to an analysis of supply and demand in the market to determine where the price trend is headed.

Before you buy a stock, take a look at its price chart for the past year or two. This will give you a snapshot of the stock’s personality from a volatility standpoint. It is highly recommended if a stock shows an excellent trend pattern, low volatility, and moving more steadily upward than many other stocks.

A Final Word: Buy Quality Whether you are investing in stocks, art, coins, or real estate, it is my opinion that it is always best to buy the highest quality you can possibly afford. Do not be afraid to pay a high price relative to earnings, book value, or sales. History shows that the premium paid for high-quality items of any kind is generally worth the extra money.

Sources: Investopedia

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