When I first ventured into the world of investing, I made sure to read numerous books and articles. I extensively searched through both online platforms like Google and offline resources. After getting all this information, I finally took the plunge into investing.
However, there were some burning questions that constantly came into my mind. What should I buy? When should I buy it? and How long should I hold onto my investment?
These questions have always been at the forefront of my thoughts before I did any investment. So I decided to create my own approach or guide you may say to answer these questions.
In this article, I am going to share exactly that. Which investments to consider, how long to hold them for, and when it might be appropriate to sell them? In this article, we will go into a comprehensive step-by-step stock selection guide.
If you are completely new to investing then you should check the “How To Get Started” article first.
Create a Universe of stocks
Alright, let’s get started with the first step; creating a comprehensive list of stocks that catch your interest. This universe of stocks can include ones you’ve heard about from others, stumbled upon online, or simply have a personal affinity for. Take some time to jot down these stocks in a spreadsheet or any other preferred method of documentation.
The goal here is to compile all the potential investment options that you believe could be worthwhile. By the end of this step, you should have a solid list of stocks that you’re considering for investment purposes.
Alright, now we’re moving on to a crucial step in this comprehensive stock selection guide. This step involves analyzing the stocks and there are two important tasks we need to accomplish for this. When you’re selecting a stock for analysis, it largely depends on the type of investor or trader you aspire to be.
However, it’s essential to have a basic understanding of both types of analysis mentioned here because regardless of your preferred approach, familiarity with these two analytical methods is necessary. This will enable you to make informed decisions when it comes to any type of investment.
The first step involves conducting a basic fundamental analysis of the stock, which includes examining the balance sheet and income statement of the company.
You can refer to either their quarterly or yearly income reports or utilize online resources like Yahoo Finance to review the historical data regarding their financials. When performing fundamental analysis, key indicators to focus on are market capitalization, revenue, income, and P/E ratio.
For instance, you should assess the company’s valuation in relation to its current stock price and evaluate its revenue and income figures. This will provide you with a rough estimate of whether the company is overvalued at its present stock price.
Imagine if it were your own company valued at $100, but only generating $1 in revenue annually – based on this scenario, would you consider buying such a business? Moreover, how much do you anticipate its revenue growth potential from that initial $1 figure? This is just an example when you add more zero’s to it then you can use the same example for any company.
Apart from this, there is a crucial factor that most people consider. The PE Ratio. In simple terms, if a company has a high PE ratio, it means the stock price is expensive at its current value. On the other hand, a low PE value is generally seen as good because it suggests the stock is reasonably priced or slightly undervalued, leaving room for potential growth.
However, this may not always hold true, particularly in growth stocks. Just because their PE ratio may be high doesn’t necessarily mean they are overpriced. These stocks often have the potential to significantly increase their revenue and income in the future.
I won’t go into all the indicators of fundamental analysis here. The main idea behind this step is that you can explore these parameters in detail to gain a better understanding of where a stock price stands and whether it’s worth investing in.
Fundamental analysis is more applicable to long-term investors compared to traders who rely more on technical analysis (which we will discuss in the next section). Nonetheless, having a basic understanding of fundamental analysis can be beneficial for both types of investors.
The next step in the process involves conducting a technical analysis. Technical analysis can be quite extensive, as it encompasses various patterns and indicators related to stock.
It’s impossible to cover everything here, but the purpose of this step is to perform a preliminary check on important technical indicators such as moving averages, RSI, volume, and support/resistance lines.
Technical analysis is particularly useful for day traders or swing traders rather than long-term investors. If you’re involved in trading and familiar with technical parameters and elements, having good knowledge of technical analysis is crucial.
However, it’s worth noting that while technical analysis is important, especially when considering the timeframe of investments, the fundamental analysis holds more significance for long-term investors. Fundamental analysis provides insights into what a company does beyond its stock price. Therefore, before investing in a stock, it’s advisable to conduct a basic technical analysis alongside fundamental research.
Final Confirmation Before Action
Alright, now that you’ve completed your basic technical and fundamental analysis, you should have a smaller selection of stocks compared to the complete list. At this point, it’s time to consider investing. Before you do so, make sure to go through the below checklist one last time.
- Review the technical analysis and ensure there aren’t any sudden movements in any direction.
- Take into account any significant macroeconomic factors or external news that may impact the entire stock market.
- If everything appears favorable and stable, then you’re good to proceed with your investment.
Here are some useful resources that can help you conduct the analysis:
- Yahoo Finance – This can help you check on company earnings and past performance
- TradingView – Popular platform for doing technical chart analysis
- FinViz – This has a good heat map to gauge overall market conditions and a quick look at advancing and declining stocks for the day.
- TipRanks – Good to check several analysts’ views on any particular stock. This can help you understand the overall sentiment for the stock.
And that is it for the stock selection guide. Hopefully you have found value in this article and it can help you select the right stock to invest in.