How to pick stocks

Wondering how to pick stocks? With so many to choose from, it can definitely be overwhelming. But, with our top tips and strategies, you’ll soon be able to narrow down your choices to find the best investments.

July 5, 2023
9 minutes
Trading Education

When you’re starting out as a trader, the first thing you’re going to want to learn is how to pick stocks.

There are literally thousands to choose from, so how do you make the right decision? Like everything else in trading, it’s all down to having a good plan and strategy. 

While it’s unrealistic to expect to pick amazing stocks every time, with our quick tips you’ll be able to choose the best stocks to invest in more often than not.

So, let’s get started.

How do I pick stocks?

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Successful traders never go in blindly when it’s time to choose stocks. They don’t make assumptions, or simply choose a company that they’re personally passionate about.

This is kind of like throwing darts at a wall and hoping for the best. 

When it comes to picking good stocks, successful traders all start the same way. Here’s what you need to do to get your foundations in place:

Step 1: Determine your portfolio goals

Before you even think about trying to pick stocks, the first thing to do is sit down and work out your “why”.

Obviously, you want to make money, but are your goals long-term or short-term? For example, do you want to build up a nice fund for retirement, or do you just want to make some quick bucks for right now? 

If your strategy is income-oriented (e.g. saving for retirement) you may want to look at stocks that pay great dividends on a regular basis. For this you’ll be looking at solid low-growth companies, as well as real estate investment trusts and bonds.

For wealth preservation, it’s all about minimizing risk through proper risk management as much as possible. Look at companies that can really weather the storm – for example, consumer staples and stable blue-chip companies. 

And finally, if your goals are all about capital appreciation, you’re going to want to zero in on companies in their early growth years. This style of investment is based around taking on higher risk for the chance of higher gains. Not for the faint-hearted!

Whichever style of trading you choose, it’s important to diversify your portfolio.

Even if you’re a low-risk style of investor, keep a little corner of your portfolio for high-risk IPOs to give you a nice little boost every now and then.

And, if you’re an aggressive investor, dedicate a little chunk to some of those low-risk stocks to cushion you against any big losses. 

Step 2: Keep up with economic news

Staying aware of trends, events and daily financial news will give you an idea of what’s going on in the markets and help you to work out which sectors and companies are most likely to succeed – and net you a big profit.

As well as reading established sources like the Wall Street Journal and Financial Times, subscribe to newsletters and blogs. You want to get range of thoughts and opinions from different sources to give yourself the most well-rounded view of what’s going on.

Doing this will help you to become more aware of how current events can change consumer behavior and therefore the stock market. This knowledge can help you to develop an argument for which industries to invest in, and which stocks to buy.

For example, an emerging middle class in India may mean a surge in demand for white goods. Or an increased awareness of environmental issues in Europe may indicate a surge in demand for planet-friendly products. 

When you’re doing your research, try to avoid making assumptions. Just because you like something, doesn’t mean other people will. Dig into news reports and look at the market’s performance in previous situations to double-check your thesis and make sure it makes sense.

Step 3: Combine your goals and knowledge in every decision you make

Once you have your goals in place, and have done your research into the market, you’re almost ready to pick your stock. 

Wise investors will take this knowledge and use it to drill down into an industry or sector that they think has potential for success, and will then do a lot more research into individual stocks and companies in order to make a truly informed decision. 

This way, rather than picking and praying, you can be confident that you’ve picked the best stock.

What are the 4 steps in picking a stock?

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In the last section we covered the strong foundation that you’re going to build upon. Once you have a strategy and a bit of background knowledge, and are confident in your abilities to make an informed decision, these are the four things you should always do before making a purchase.

Step 1: Analyze the market

According to research by the American Association of Individual Investors, 75% of stocks move in line with the market. So if the market is on the rise, most stocks will move upwards too – increasing your chance of making a successful trade. 

If you’ve followed our tips above, you should already have some background knowledge of the market as well as the factors that can influence it.  Now it’s time to dig a little deeper.

Each day, before the markets open, spend a bit of time checking out global and financial news. Think about how it may affect your day’s trades, and adjust your plan accordingly. 

It’s a good idea to enter your market observations in your trading journal so that, when you look back over your decisions, you can see why you acted the way you did - intentional trade journaling is the backbone of any successful trader.

Step 2: Look at the ETF page for the industry

Once you’ve used your market knowledge to decide which industries are most likely to match your strategy, the next step is to check out the exchange-traded funds (ETFs) based in this industry.

An ETF is a pooled security similar to a mutual fund – the only difference is that they can be sold on a stock exchange. 

You can find the most popular ETFs by typing your chosen industry into Google along with the word “ETF”. This way you can see which stocks the exchange traded funds are backing. This gives you a good idea of which ones experts believe are most likely to turn a profit.

Look for the official ETF page to find the fund’s top holdings, and work from there.

Step 3: Use a stock screener

Most brokers offer free screening tools to help you filter through thousands of stocks to find the ones that best meet your requirements.

As well as being able to filter by industry, you can also look at fiscal factors such as market cap, earning per share, dividend yield and relative strength index. 

The more filters you add, the smaller –and more aligned – your pool of available stock becomes. So, a job that felt super overwhelming earlier has suddenly become a lot easier. 

Having a deep understanding of your own strategy and the market will help you to drill down during the screener phase. We really can’t stress enough how important it is to have a plan of action!

Some screeners let you set up custom alerts, too, so you find out as soon as your parameters are met. This saves you time instead of running the same search every day, and can let you get the scoop on the best buying and selling opportunities.

Step 4: Research your shortlist

After running through the screener, you’ll have a shortlist of stocks that you’re interested in. But before you hit ‘buy’ it’s time to do one final bit of analysis.

The first thing to do is to get the expert opinion on the stocks you’re interested in. This can be via blogs, stock analysis articles or news releases. 

After seeing how industry commentators feel about your potential purchases, the final research step is to check out the business itself. 

You don’t have to delve into longwinded financial statements or complicated 10-Q or 10-K reports. Just check out the company website and look for corporate presentations. This will give you a quick overview about how the business makes its money and where it sees itself going in the next few years. 

Don’t buy a stock unless you totally believe in the company and its mission.

Throughout this whole step, you should be using your critical thinking skills. Don’t believe everything you read, and don’t take opinion as fact.

Getting a range of opinions and thoughts, and seeing each side of the argument, will help you to make an informed decision.

How should a beginner buy stocks?

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The best way for a beginner to buy stocks is to sign up with an online broker. Many of these traders offer commission-free trading, are free to sign up with and let you start investing from as little as $1.

Once you have your strategy and plan in place, it’s a good idea to practice first.

Some brokers have ‘paper trading’ on their platforms – aka market simulators. These give you fake money to play with and a chance to test your strategy. It’s basically a sandbox and a great way to build your confidence, without the risk of losing your life savings.

How much stock should I buy as a beginner?

Softly, softly is the best approach – at least when you’re starting out. Remember that, while stocks can go up and make you a lot of money, the reverse is true as well. If you make a wrong decision, or something happens that impacts the market, you could lose everything.

That’s why it’s important to never invest more than you’re willing to lose. 

It’s also important not to put all of your eggs in one basket. Diversify your portfolio as much as possible. This means investing in different companies, different industries and different types of stocks (e.g. low risk vs. high risk). 

If you don’t want to put a lot of capital out up front, look for a broker that offers the chance to buy fractional shares. 

Fractional shares let you buy stock based on a monetary amount rather than per share. For example a whole share in Microsoft would be really expensive, but a percentage of a share will fit into your budget. Even if you only have $10 to invest.

Of course, everyone is different. The amount of stock you decide to start out with will depend on how much money you have available to invest, how much the stock you want costs and how risk-averse you are.

It’s also important to factor in the cost of commission. This can make a dent in your profits.

Picking stocks is just the beginning… now it’s time to hone your skills

TradeZella Trade Log

Once you’ve decided on the best stocks to invest in, the next thing you need to do is create and follow a winning trading plan. Having a solid strategy will help you to turn more consistent profits as a trader – it’s just as important to your success as choosing the right stocks.

Staying the course with a plan involves a lot of discipline. We’re all human, after all, and sometimes our anxieties can cause us to make impulsive decisions like selling when we should hold. The best way to master your emotions and understand your trigger points is to use an analytics tool, such as a trading journal. 

But what is a trading journal? At it’s most basic it’s a way to keep track of the stocks you’re trading (along with key data like  position sizing). You can also include your thoughts on the current market behavior, what’s going on for you that day and any other observations.

Using a trading journal can supercharge your profit-making power as you start to notice patterns.

By using a journal you’ll soon see where you’re doing well, and what you could improve upon. For example maybe you come in too gung-ho on Tuesday mornings and take on too much risks, or see a slump in profits on Wednesday afternoons when you’re tired and ready for the weekend.

You can journal using a spreadsheet and a template, but the most powerful way is to use TradeZella’s unique journaling software. We’ve got a wide range of features to help you notice patterns quicker and develop more successful strategies.

And, because our software integrates with top brokers, there’s less manual data for you to input – giving you more time to focus on picking the best stocks and developing a positive win rate.

Sign up for TradeZella today and take the fast-track to achieving your trading goals. 

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