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 brief guide on online share trading will outline these basic steps for picking high performance stocks.
Step 1. Decide on the time frame and the general strategy of the 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 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.
Short-term Investor Strategies in Stock Picking
If you decide to be a short term investor, you would like to adhere to one of the following strategies:
- Momentum Trading: This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this 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.
- Contrarian Strategy: This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stock’s fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops drastically 20% without showing decline graph, for few weeks after supposedly 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. General advice on this strategy is to find a list of stocks that have recent drops in prices, analyse the potential for a reversal (through candlestick analysis). Is the drop on market reaction or actual breakdown in the process of company? If the stocks demonstrate candlestick reversal patterns, one should go through the recent news to analyse the causes of the recent price drops to determine the existence of over-sold opportunities.
Step 2. Do deep Research
Conduct researches that give 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 stocks according to your needs.
Step 3. Diversify to Absorb Loss
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. Application of Markowitz model in Indian stock market is utilised by expert stock brokers. 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.
Step 4. Explore
Extend your trading exposure with a stock broking company. Open a demat account with them. Demat account charges are different for the services offered by the company. Do proper research on the effective demat account rates and select better service oriented stock broking company.
These four steps should get you started in your quest to consistently make money in the Indian 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. Here, you can download online share trading app.