How to Pick a Stock
Jump to a Topic:
- Learn How to Pick a Stock
- Plan Your Picks
- Stock Picking Strategies
- Trading Tools & Mentors
- Pick Stocks With Confidence
Learn How to Pick a Stock
Picking the perfect stock isn’t about uncovering the next high-profile company with a rising ticker symbol.
You’ll know how to pick a stock that is “perfect” when the realization hits you that such an opportunity is any stock that makes you money.
Trying to find the most profitable stock for you can be overwhelming because of all the information, news, and data available today for any ticker symbol. Every market or investment pundit has a different take on why any particular stock is a dud or how it’s the next best thing for investors. All the software trading platforms give you access to immense amounts of data.
Don’t drown in the information overload. Develop a plan that screens all the news and information so that investing in any stock makes sense for you and your investing goals. Make sure your stock investment plan is something comfortable to you and not forced upon you.
Whether you’re day trading stocks or padding your long-term portfolio, knowing how to pick stocks becomes a personal endeavor. There are common investment methods, but your style will be based on your individual psychological approach. There isn’t a single “best” method to picking stocks. You’ll need to develop your own basic strategy.
You’ll also need to consider your capital position — how much money do you have to invest and the amount you are willing to risk. This can influence whether you will select stocks with lower or higher prices.
Developing your own stock selection plan will help you learn how to evaluate a stock and choose wisely.
Plan Your Personal Stock Picks
Everyone has a different priority for investing. Saving for retirement or a college fund is a priority for building wealth while regular investment income may support immediate spending plans, such as a new recreational vehicle or second home. Some investors may just want to protect the financial portfolio they already accumulated with added stock investments.
Most people investing with stocks will fall within an investment plan of wanting to grow the amount of wealth they have built up or produce a stream of income using the money they have accumulated.
When considering how to pick a stock, ask yourself these investing questions:
- Is your goal to buy stocks and hold them as a long-term investment, potentially earning dividend income over the course of years?
- Is your goal to buy and sell stocks more quickly to produce income, possibly trading regularly within days or weeks of your initial investment?
Whether you want to grow wealth or create income, you’ll need a stock selection plan to meet your goals. The best place to start picking stocks is to determine what you know.
Conduct a personal review of what you know about certain industries. Do you have knowledge about or career experience in retail, energy, medicine, or technology? Stick with what you know about companies that sell stock. This keeps you in a comfort zone as you study stock investment possibilities.
Danielle Shay, Director of Options at Simpler Trading, encourages investors to get to know the “personality” of any stocks that are interesting to them.
Shay knows that finding stock investing opportunities requires watchlists or chart scans, but investing needs to be more personal, more specific.
“If you trade the same ticker, over and over again, you will get to know the company, the stock” Shay encouraged. “You’ll figure out how it normally moves — and what is abnormal about it.”
How to pick stocks to invest in is less about a quick pick and fast profits, and more about a disciplined process over time. Find what you know, stick with it, and develop a personal plan for identifying winning stocks.
Stock Picking Strategies
Your investing strategies will follow your life situation.
Retirees who have invested for awhile will likely look to maintain their wealth while newer investors may need to establish a more aggressive growth or income plan. Some investors may be seeking faster profits to pay for a big purchase such as a down payment on a new home.
A knowledgeable foundation is key to developing strong investment strategies. The more you know about how to pick stock the more confidence you’ll have when sorting through research or considering risk.
How to pick a stock starts with studying the basics.
Learn some essential terms such as price-to-earnings (P/E) ratio, revenue growth, dividend yield, or earnings schedule.
The P/E ratio is an indicator of how much a stock really costs when calculating price per share divided by earnings per share. Total sales of a company during a certain period determines revenue growth. Dividend yield shows how much investors can earn from a stock each year. An earnings schedule shows when a company will report earnings and those reports contain valuable information about the health and progress of a company.
Other basic terms related to how to pick the right stock include:
- Bull market – stock market prices are expected to rise
- Bear market – stock market prices are expected to fall
- Rally – a sudden and rapid rise in the price of a stock or in the overall market
- Volatility – indicates how fast the market or a specific stock moves up or down
- Liquidity – level of ease in buying into or selling out of a stock
- Trading volume – how many shares of stock are traded daily, helps indicate liquidity
- Stock symbol – letters that represent the name of a company on an exchange, i.e. Microsoft is listed as MSFT.
These are limited definitions so you’ll want to study more about essential stock terms and strategies.
In addition to the essentials, you’ll want to study different sectors within the stock market. Popular sectors include retail, energy, healthcare, entertainment, or technology. Reducing your potential choices within a sea of thousands of stocks in the marketplace will help you simplify the process. Remember to follow your interests or experiences when considering sectors.
Danielle Shay stresses that investors should research sectors that show signs of market strength over other sectors, i.e. which sector is stronger – energy or technology?
“I like to look within strong sectors of the market,” said Danielle Shay. “Then, I pick the stocks within the sector that show strength over others such as one retail company vs. another.”
A unique stock picking perspective used by professional traders at Simpler Trading is identifying “Honey Badger” stocks. These are elusive stocks that can defy current market trends.
In nature, a Honey Badger may appear small and not very powerful. In reality, it’s appearance is deceiving as this creature is strong and will defy tough circumstances, like fighting a cobra, to survive. They follow their own path no matter the obstacles.
Like the wild animal, Honey Badger stocks aren’t visible to the average investor. These company stocks do not care how the market is trading as they continue on their own path forward. Once you find a Honey Badger stock, you can gain confidence in trading despite the current market conditions.
As we’ve talked about, the stocks you trade will depend on your personal preferences; level of knowledge and experience; strategies and tools; and amount of capital. Any one of these can change as you pursue your stock selections. How to decide what stocks to buy is a dynamic endeavor. You can learn to adapt to changing conditions as you learn more about your weaknesses and strengths while choosing the right stock.
Here’s a quick reference for how to pick a stock:
- Develop a disciplined plan for selecting stocks
- Start with one stock and study it thoroughly
- Follow charts to understand market and stock movement
- Know your capital and your defined level of risk
- Don’t get off course — stick with your plan
Use Trading Tools, Find A Mentor
Picking stocks can be simpler if you use a trading software platform such as TradeStation® or thinkorswim®. These are the most popular platforms among professional traders at Simpler Trading.
Stock trading software provides access to historical trading data, news, a stock trading simulator, live stock market prices, educational resources, stock market charts, trading strategies, and various charting tools.
In today’s world, trading software is necessary for trading, but try not to overcomplicate things. Refer back to the basics and don’t let the tools overwhelm you.
Along with technology, seasoned stock investors understand that participating in a community of fellow investors helps build stock picking skills faster.
Simpler Trading provides a community to help you navigate which tools and technology work for your investing plans. You can have a good day trading stocks while learning from others with similar investing thoughts, styles, and plans. How to choose stocks is a regular conversation topic in Simpler Trading chat rooms.
In any activity where you’re trying to learn, it’s important that you find a mentor to guide you. Having a mentor is invaluable to learning faster and developing a winning stock investing plan.
Instead of spending hours searching the markets for one “perfect” stock, you can learn from others how to pinpoint winning stocks. Danielle Shay, a mentor at Simpler Trading, shares how her stock picking tool, Phoenix Finder, quickly identifies strong stocks and sectors. This is at the top of the list for the best stock screener for day trading within the Simpler community.
The Simpler Trading community also provides insight into which stocks to buy now, stock market trends, and winning investment strategies.
Battling the uncertainty of the stock markets while studying how to pick stocks are constant reminders of the need for the Simpler Trading team that works daily to support investors.
Investors who can find the right coach can find a path to a winning investing plan. You can start picking stocks better than most by starting simple with the right tools and the right guidance.
Learn to Pick Stocks with Confidence
Picking stocks isn’t like trying to buy a lottery ticket or throwing a dart at a stock chart. You don’t want to make a random decision and hope for the best.
The urge to “click and buy” affects newcomers and seasoned investors. There are literally thousands of publicly traded stocks. Add in thousands of mutual funds and exchange traded funds (ETFs) along with futures and options, and the sheer number of potential choices can cause analysis paralysis.
Always focus on the central goal — steady growth of your investing account over time. This allows you to become comfortable in how to pick stocks and builds confidence with each winning pick.
The “perfect” stock doesn’t have to be discovered today so you can retire tomorrow. Stay focused on your individual stock picking personality and interests while following a disciplined and active plan.