How to Select Profitable Stocks
By Dale Gillham | Published 31 July 2018
Learning to invest in the stock market 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 developed the skills to select the right stocks.
I am often asked by many investors and traders “How do I develop a watch list of stocks to invest in”, so today I will share five tips in how to 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 what time frame you a looking to trade over (short, medium or long term). This will help you understand what 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 or even as a career and replacing your job.
Understanding your why and then determining the criteria for the stocks you want to to invest is vital to your success as a trader.
Number 2: Invest in businesses you understand and like
You should only invest in business 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, all to often it comes crashing down. An example of this type of stock would be rare earth materials.
Number 3: Conduct top down analysis to develop a watch list
The third step is to conduct top down analysis on the stocks in each sector and highlight the ones that you think are likely to have potential and could have a jump. This will give you a broad idea of what stocks to keep an eye out for in each sector.
Pro tip: look for stocks that haven’t had a run rather than stocks that are on a nice run at the current time period.
Number 4: Pick winning stocks
This point is very important when developing a watch list. After conducting top down analysis, you will be sure to have identified many stocks but the ones you want to keep an eye on are the winning ones. You want to keep an eye out for stocks which have a good business model and room for expansion and growth. These potential stocks are more likely go on a run and be winning trades.
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 and they continue to add up. 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 them at a later point.
Pro tip: The ideal amount of stocks to have on a watch list is between 1 and 10. Anymore and you are looking to broadly.
So in short, the five steps to developing a kick ass watch list include:
- Criteria: determine your portfolio type (short, medium or long term) and strategy (low, medium or high growth) and time frame (short, medium or long term)
- Conduct top down analysis (start by looking at 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
So what's happening in the market? Watch the video to find out.
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