The clear objective of selecting stocks is to choose winners. But the process of getting there gets complicated, and fast. Your stock picks on a given day might seem easy and obvious, but there are always many variables to consider.
Stock picks depend on the specific goals and objectives of the investor. Short term investors use different criteria than long term investors, with completely different realms and processes of analysis applied.
In either case, though, the key is in understanding your needs and risk tolerance before you even consider making stock picks.
Because all stocks present some degree of risk, and a wide variance in upside potential and relationship to the market itself.
Risk vs. Liquidity
Another thing to consider when picking stocks is liquidity, or your ability to turn your stocks back into cash if and when necessary.
When trading in listed stocks this isn’t really a consideration, since you know exactly how and when you can get your hands on your money via a sale. But if you’re dealing with unlisted securities bought directly from a non-traded company, selling your stock may not be quite that simple.
The Two Forms of Stock Analysis
One form of criteria to assist in picking stocks is called fundamental analysis, which looks closely at the state of the underlying company. Financial strength, profitability, capitalization, and future outlook in light of specific products and positioning with those niches are all fair game to determine the viability of an investment using this method.
Another way to evaluate a stock is called technical analysis. This approach considers the performance of the stock itself over time, looking at trends in certain market conditions that illustrate trading patterns and parameters.
Investor First, Stock Picks Second
Once the investor understand what they are trying to achieve, and the level of risk they are willing assume to get there, the next step is to engage in both fundamental and technical analysis, as well as consulting trusted advisors who know how to interpret this data and have a feel for the market itself, to narrow the field of choices, from which specific stock picks will be made.
But, no matter how much homework goes into the process, there are no sure things in the stock market. This is why, even more than the stocks themselves, the wise investor understands their needs and tolerances first and foremost.
From there, stock picking takes place from an enlightened perspective, matching needs and parameters with the history and inherent potential of specific stocks on an informed basis.