It is never easy to find the right stocks to invest in, but some tools and techniques can help you avoid making costly mistakes when choosing the best stocks for your portfolio. Once you’ve found the stocks with the best growth prospects, you must remember to always monitor your portfolio to apply necessary changes to the required money and risk management rules that will help you control your risks.
You also have to keep an eye on the news and what’s going on in the markets. Economic and financial calendars are great tools to spot any upcoming important economic statistics and publications that can trigger higher volatility. If you want to know what the best opportunities of the moment are, have a look at this list of the best penny stocks to buy now.
So, what is the best way to pick the right stocks to invest in for your portfolio?
The first step is to determine your level of financial, investing, and trading knowledge, so then you can get to working on improving it! As Warren Buffett used to say, “Risk comes from not knowing what you are doing“.
The next step is to pick your investing or trading style, according to your personality, your trading capital, your risk-tolerance, as well as your financial goals. This step is extremely important, as it will help you work on the right trading plan, decide how you will approach the markets, and how you will trade them.
As a trading plan is like a set of guidelines that describes the way you will trade the markets, it includes the kinds of trading setups to follow to enter and exit the markets, based on the type of market analysis you’ve picked. Technical analysis and fundamental analysis are two of the most popular ways to analyze the markets and make investment and trading decisions.
Technical analysis relies on the analysis of an asset price action and the use of technical and mathematical indicators to determine the current trend of an asset and its future direction. This type of analysis is based on 3 assumptions: 1) markets move in trends, 2) markets are efficient and display all available information at a given time, and 3) history tends to repeat itself.
Fundamental analysis, on the other hand, doesn’t rely on chart and graphical analysis, but on fundamental factors. Its goal is to determine the intrinsic value of an asset and compare it to its market value to spot any buying or selling opportunities. With stocks, fundamental analysis relies on financial ratios and data regarding a company, its pairs, and its sector to determine its real value. Discounted Cash Flow (DCF) is the most popular valuation method of an investment based on its future expected cash flows.
Finally, once you identified your trading style and the type of market analysis you will use to pick stocks, you also must decide which type of stocks to focus on, depending on your trading goals, strategy, and risk-tolerance. You could, for example, focus on riskier stocks, like penny stocks or growth stocks for instance. You could also decide to focus on more stable and mature stocks, like blue chips or value stocks.