If you are an avid late night TV viewer you’re probably used to seeing a lot of infomercials promoting ways to get rich and make it on Easy Street. If you are patrolling the Internet you’ll see the same thing. One area that often gets saturated every few years is the guy who will teach you how to make winning stock picks 100% of the time. Stock picks refer to the act of buying a stock or sometimes selling a stock to make a profit on the other end of the deal.
The new folks who come on the scene are usually armed with some study or course that they learned that will guarantee them a foolproof system for stock picking that will make them rich in a couple of months. I’ll let you in on a secret that no one else will tell you. There is no magic system; there never was and probably never will be. That does not mean that cannot get rich and find Easy Street one day; you will have to work hard like the rest of us to do it. The process is part Einstein and part Picasso. The good traders and investors don’t simply rely on guesswork, they pay close attention to the trends and moving averages among other factors.
You cannot always determine what a stock price will do because the market is like a big river with lots of things going on it. In some spots it is fast flowing while it is placid and calm in other spots. External factors such as the weather, politics, and environmental shifts including of course supply and demand can influence prices every second, hour or day of trading. For the novice day trader, making stock picks offer a chance to ride a quickly moving stock in either buy or sell mode. Of course that means including a margin of error to buffer any calculations they may have constructed.
The long term investor has done the heavy lifting by investigating the stock, the company the fundamentals of the prospectus and looked at the 52 day moving averages to establish a time to get into the market. The stock will be held until the investor is ready to sell to take a profit. That may be weeks, months or years depending on their strategy and the movement of the stock. Their process is very different when it comes to stock picks than a day trader.
There are thousands of stocks to choose from each day and many day traders have taken the time to develop a strategy that suits their style of speculation. Many will study charts extensively the night before to determine which companies will be chosen to tag in the morning. They may choose their stock picks from hot tips and previous buy orders suggested by analysts. They might be watching the news and realize that certain commodities were coming into play due to external influences. Everyone who works the boards has a system that they have developed.
Whether a trader finds a few good stock picks while scanning the forums or from his email newsletter that is predicting a dramatic shift in a particular sector, traders often start by checking things out. The mark of a good stock pick is related to the amount of information you can obtain from the company and the news analysts. By defining a few parameters, it is not hard to find good intra-day stock picks to keep you going.
Start by figuring out a few trading or inventing objectives. For example do you want to earn a certain amount of money from trading each month and how do you intend to manage your finances in order to achieve our income goals? What kind of trader or investor are you? Are you patient, impetuous, and easily spooked when things go bad? Can you handle making a large sum of money and then losing a large sum instead? How are you at money management? These factors are just as important as learning about moving averages, PE ratios and relative strength. Once you have figured out your style of trading take a look at some of the statistics that analysts regularly record. You don’t have to use all the data for your selection but it helps to understand the most widely used metrics.
- Price/Earnings ratio – this is the measurement of how efficiently a company generates profits with its assets.
- ROE – Often the most often cited measurement is the Return on Equity which is the net income divided by the book value.
- Relative strength – this is the measurement of the share price of the stock’s performance against the overall market.
- Dividends – When you buy a stock that returns a portion of its profits on a regular basis to its shareholders that is called the dividend. Companies that share the profits can return a good monthly or quarterly income if you own a sizeable portfolio of shares.
- Cash flow – when a company offers its annual report there is usually a lot of information to review. One line that sticks out is the cash flow forecast. How much money does the company actually has to pay bills and take care of business without resorting to borrowing or selling more stock? Pay close attention to these numbers if you are a dividend investor.
- Earnings growth – The stock analysts usually report earnings growth predictions for their closely followed stock picks. This usually covers advance forecasts for fiscal quarters or in some case annual earnings.
- Recent earnings surprises – this is the difference between the earnings forecasts and reported earnings. This is the part we hear about when the company beats or comes in below earning expectations.
- 52 week highs and lows – This is the spread often shown of the stock’s momentum over a 52 week period. The chart clearly shows the volatility or lack thereof for given stock picks.
You can make a lot in the market and of course you can lose your shirt. The key to making and keeping your money over the long run is not how smart you are at stock picks but how well you manage risk. If you are into chart patterns, you can pick stocks that offer a simple ratio that allows you to clearly see when to get in and when to get out of the market. Easy Street is just around the corner if you know what to look for. That is the real value of smart stock picks.