Stock picking – get started

There are thousands of companies listed on stock markets and picking which stocks to trade can be confusing, especially if you are new to stock trading.

In this blog, we will guide you through the share selection process.

This blog will discuss how to start picking companies.

Start with the time horizon

The longer the period that you want to hold a position, the more detailed the analysis has to be.

This is because when you look at a longer time horizon, you need to make sure that there are solid fundamental reasons why the price of a share will continue rising – or falling, and this requires detailed analysis. For a short-term time horizon, you will only be looking to take advantage of short, quick price movements, and so such a detailed level of analysis is not needed.

Choosing a time horizon can depend on how much time you have. If you have a lot of time to trade and watch price charts, then you can trade on a shorter term time horizon.

If you only have an hour a day, or a week, to dedicate to trading, then you would be more suited to longer term trading.

At the end of this lesson, you will be able to choose which kind of analysis you want do.

Picking your stocks – start simple

If you're new to trading shares, it's best to start simple. Rather than diving straight into riskier, companies that have a small capitalisation, or obscure start-ups, try your hand at trading big, well-known companies.

These stocks are very liquid, meaning it's easy to get in and out of trades at the price you want. They’re always in the news and there’s plenty of research material available.

It may be a good idea to watch their price for a few weeks before committing any real money to the market. A demo account can be great for this.

Go for what you know

Once you're ready to begin stock-picking, start with something you know.

If you've worked in a particular industry, you will have useful background knowledge that will help you understand what issues are important for a company.

Even if you're a regular customer of a company, you might find it easier to understand their business model than a company that you do not know.

Being able to witness first-hand when a company's business is slack, or when its product range seems better than usual, can help you start thinking about whether now could be a good time to trade its shares.

Don't forget about shorting stocks

Remember too that choosing a stock to trade is not only about working out which one you think will rise in value – traders can make just as much profit by shorting a stock – selling it to profit from its anticipated price decline – as they can from buying one.

So if a company strikes you as a disaster waiting to happen, you may have just spotted a trading opportunity.

Pick a sector

Many professional traders decide which stocks they are going to trade through a top-down process of elimination. To start with, pick a sector or an industry that either has good growth opportunities – to buy stocks – or may look like they could be in trouble – to short-sell stocks.

Certain industries tend to perform better or worse in certain economic conditions or can be disproportionately affected by external events.

During an economic downturn, for example, retailers, holiday companies and restaurants tend to suffer as consumers are less willing to spend. Consumers may, however, flock to discount retailers, fast-food chains and voucher companies, pushing up their stocks.

There are also certain goods and services that people will need however well off they are. For example, defensive sectors, like pharmaceuticals or waste-collection, will tend to at least hold firm during a downturn.

Weed out the best companies in that sector

Once you have settled on a sector, you need to start looking at many different aspects of the various companies in that industry and find one or two you believe will present the best trading opportunities.

How you do this takes us back to our original point about time frames – the level of analysis you apply will be very different depending on how much time you have and how long you wish to hold the position for.

Where to find the information you need

There are numerous resources to help you with your research.

For fundamental analysis of a company’s performance and prospects, read its quarterly and annual financial reports.

You can usually find these on the Investor Relations section of a company's website.

There are also regulatory bodies in each country that require public companies to file their financial statements for public viewing.

If a company is listed in the UK, for example, it will file its earnings and other announcements with Companies House, whose website you can search.

For US-listed companies, you can search the Securities and Exchange Commission (SEC) website.

For a mix of fundamental and technical analysis, you can also use a stock screener – a software program or online subscription service that helps you pick stocks based on a range of criteria that you can customise.

Fundamental traders could, for example, customise the program to compare companies based on their sales, profits and any of the other yardsticks listed above.

One example of a free stock screener is YCharts, that is available in English. Alternatively, you can simple enter "free stock screener" into Google.com.