Investing for Profit

Stock Investing for Profit

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

Are You a Long or Short Term Investor?

Step 1-- Pick Your Market Investment Strategy.

Decide on the time frame and the general strategy of your stock market investment. This step is very important because it will dictate the type of stocks you buy.

Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages in the market along with stable growth. The key for finding these 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 on the other hand you decide to be a short term investor in the market, you would like to adhere to one of the following strategies:

a. Momentum Trading. This strategy looks for stocks that increase in both price and volume over the recent past. Most technical analyses support this Market trading strategy. 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 looks for over-reactions in the stock market. Research shows that the stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces bad news, people panic and price often drops below the stock's fair value [i.e. it is cheap]. To decide whether a stock over-reacted to a piece of 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. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I would go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities. [Most people make the mistake of buying when prices are high and selling when they are low this method allows you to invest in the stock market when prices are low and sell when stock prices are high. -- editor]

Step 2. Research Individual Stock Market Selections

Conduct market research that gives 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 the right Stock Market investments to fit your needs.

Step 3. Diversify Your Stock Portfolio

Once you have a list of stocks to buy, you need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is to conduct a Markowitz analysis for your portfolio. This type of market 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 will provide you with a sense of confidence that helps you to make better trading decisions for your stock market investment portfolio.