Investing Theory

A Quick Introduction to Stock Picking

October 12, 2023

Investing in the stock market can seem like a daunting task, especially for beginners. With so many stocks to choose from and constantly changing market conditions, it can be overwhelming to know where to start.

However, with the right knowledge and strategies, and keeping an eye on the financial news, stock picking can be a rewarding and profitable experience. In this beginner's guide, we will cover the basics of how to pick stocks, portfolio management, and stock valuation to help you make informed investment decisions.

After all, at the end of the day you have tons of stocks to choose from - you need to know how to make decisions about which ones to buy!

Stock Trading: The Matter of Investment Strategy

First of all - hearty congratulations! Since you have found our blog post, it means that you have decided to start your adventure with investing. You know a thing or two about individual stocks, mutual funds and surely you have heard about Warren Buffett.

And it is definitely a good start - before diving into more advanced terms, like balance sheet, management fees, mutual fund, index fund or market risk, it's important to have a stock market basics good understanding. The stock market is where investors buy and sell shares of publicly traded companies. When you buy a stock on, for example, New York Stock Exchange, you are essentially buying a small piece of ownership in that company. The value of a stock is determined by supply and demand, as well as the company's financial performance. And to put it bluntly - stock price of each public company depends on it, too.

Companies' stock prices: the determinants

There are various strategies used by investors for stock picking, and it's important to find one that aligns with your investment goals and tolerance to risk. Some popular strategies include value investing, growth investing, and dividend investing.

Value investing involves finding undervalued stocks and holding onto them for the long term - this may include, for example, choosing slightly older companies that no longer proverbially conquer the world but are coolly priced, i.e. various McDonalds, Coca-Cola, etc. Growth investing focuses on companies with high potential for growth of future prospects, while dividend investing focuses on companies with high dividend yield that pay out regular dividends to shareholders.

Once you understand the basics, it's worth taking a closer look at the subject of stock choosing strategies itself. For those taking their first steps on the stock market, listen to our small investment advice: we recommend betting on a diversified portfolio - and allocating a small part of it to growth stocks. This is a relatively safe strategy, which at the same time allows you to see the tangible results of your actions in quite a short time.

When picking stocks, it's important to consider the company's valuation. This refers to the price of the stock in relation to the company's financial performance. A stock that is undervalued may be a good investment opportunity, while an overvalued stock may not be worth further investments. Some common metrics used to evaluate stock valuation include price-to-earnings ratio and price-to-book ratio.

How to Pick Stocks Properly?

Before investing in a stock, it's crucial to do your research and analysis. This includes looking at the company's financial statements, management team, competitive landscape, and industry trends. It's also important to keep up with market news and events that may impact the stock's performance. By conducting thorough research and analysis, you can make more informed investment decisions based on proper data (gathered from income statement, cash flow statement or balance sheet).

And at the end of this paragraph - an interesting fact. Research shows that a lot of people at the beginning of their investment journey bet on.... investing in their employer's company. Experts point out that this is not a bad tactic - because it teaches safe investments methods, regularity in making relatively small contributions. Noteworthy, most 401(k)s have a fairly limited selection of stock mutual funds - and no access to individual stocks.

Stock Market: Investors' Commitment to Long-term Portfolio

A well-diversified portfolio is key to making right investments. It's one of key trading strategies, widely recommended for beginner investors. This tactic means investing in a variety of stocks from different industries and sectors.

By diversifying your portfolio, you reduce the risk of losing all your money if one stock performs poorly. It's also important to regularly review and rebalance your portfolio to ensure it aligns with your trading goals and risk tolerance.

Psst... If you're one of a long term investors need a helpful hand in terms of portfolio management - be sure to check Scrab's portfolio management feature!

Scrab's Portfolio Management feature: summary view.

Exchange Traded Funds: Does Stock Picking Apply to Them?

ETFs have become increasingly popular in recent years as a way for investors to diversify their portfolios and simplify their strategies. They are made up of a basket of securities, such as stocks, bonds, or commodities, and are designed to track the performance of a specific market index.

ETFs can be bought and sold throughout the day, unlike mutual funds, for which the trades are executed only at the end of the day.

It is important to know that picking an buying best stocks is a type of active management. ETFs, on the other hand, are classified as passive funds, better for new investors without much experience, and although the question of stock choosing in their context often arises - it is a completely wrong question.

ETF in tool.

Investors choose ETFs mostly based on their expense ratio and whether distribute or accumulate dividends.

If you want to try your hand at it - bet on It allows you to take you ETF research a step further, by not only showing per country and sector diversification and biggest holdings, but also showing your fundamental metrics calculated based on what companies are include in the ETF.

This way, when having to compare two or more ETFs covering the same country/industry, you can quickly check which of them has companies with highest average margins, lowest debt or fastest revenue growth.

Those metrics are calculated automatically, on the ETF level, without you having to check each of tens or hundreds individual companies in it!

Bottom Line: Investing in Stocks Made Easy

If you're one of individual investors who are still unsure about how to make proper stock picks and efficient economic data analysis, it's always a good idea to seek professional advice.

Financial advisors and stock brokers can provide valuable insights and help you make informed investment decision, allowing to realize your investing goals. They can also assist with portfolio management and offer personalized strategies based on our needs, stocks' past performance, financial ratios and markets' trends.

Remember, however, that with your own development, it is worthwhile to approach the matter individually - and to decide on choosing stocks by yourself. Especially that even without the help of brokers you will not be left alone with this challenge - at the moment there are many tools available on the market, which analyze tons of data in seconds and make the displayed results completely bias-free (which, in case of relying solely on brokerage accounts, seems basically impossible to achieve).

Personally, we encourage you to use the reliable tool for these purposes :) - and watch your money invested work for you. tool benefits.

The stock market is all the stocks you can buy or sell on many different exchanges. So the choice is extremely wide! By following above mentioned tips and investment strategies, you can become a successful stock picker and build a profitable investment portfolio.

Remember to always do your research, diversify your portfolio, and seek professional advice when needed. So start investing today - we're keeping our fingers crossed for your efficient money making!

Psst... If you would like to read more about the fair level of stock's current price and other buying stocks principles be sure to read our post on Secrets of Investing and good price for a specific company.

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