How to Select Profitable Stocks
By Dale Gillham |
Learning how to select profitable stocks is one of the most valuable skills you can develop. It is also one that will make you a lot of money if you have the right strategy and the skills to select the right stocks.
I am often asked “How do I develop a watch list of stocks”, so today I will share with you five tips as to how you can select profitable stocks to place on your watch list.
Number 1: Set your criteria or in other words, identify what you want to achieve
The first step in developing a watch list is to set the criteria for what you are looking for. This includes determining your portfolio type and growth strategy, whether it is low, medium or high growth and the time frame you a looking to trade over (short, medium or long term). This will help you understand the type of stocks you are looking to invest in.
This can be better understood by knowing your why. What do you want to achieve from trading? Is it to generate supplementary income, retire early, start a new career or even replace your income?
Understanding your why and then determining the criteria for the stocks you want to invest in to achieve your goals is vital to your success as a trader.
Number 2: Invest in businesses you understand and like
You should only invest in businesses and sectors that you understand. If a company operates in an area you do not understand stay away from it. All too often, investors buy speculative stocks in areas that they don't understand because they have gotten the impression that it is a good investment.
However, if they don't understand the business or the industry they are in, it can come crashing down. An example of this type of stock would be rare earth materials.
Number 3: Conduct top-down analysis to develop a watchlist
The third step is to conduct top-down analysis on the best sectors to invest in and then identify the stocks within each sector that are likely to rise in price. This will give you an idea of which stocks to keep an eye on in each sector.
Pro tip: You want to look for stocks that have been trending down rather than stocks that are rising nicely as this is where the greatest opportunities will lie.
Number 4: Pick winning stocks
This point is very important when developing a watch list. After conducting top-down analysis, you will have identified many stocks but the ones you want to keep an eye on are the stocks that have a good business model and room for expansion, and growth. This is because these companies are more likely to have potential gains in the future. You can analyze the fundamentals of a company to identify which are the winning stocks to place on your watch list. It is also worth learning how to trade stocks so that you are in a position to take advantage of the opportunities when they arise.
Number 5: Stay up to date
The fifth and final point to developing a watch list is to stay up to date. All too often people get overwhelmed with long watch lists of potential stocks to buy. I recommend staying on top of your watch list and removing stocks that don't meet your criteria. There's no reason that you can’t revisit these stocks at a later point.
Pro tip: The ideal amount of stocks to have on a watch list is between 1 and 10. Any more and you are looking too broadly.
So in short, the five tips for developing a solid watch list include:
- Criteria: determine your portfolio type (short, medium or long term), strategy (low, medium or high growth) and time frame (short, medium or long term)
- Conduct top-down analysis (start by looking at the top 20, then review the sectors and identify stocks you think are going to rise)
- Invest in businesses you understand and like
- Scan for winners
- Stay up to date