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The most important thing, rather the only important thing, in stock trading is to find a stock that can earn you a profit. As simple as it may seem to pick stocks, it involves a lot of nuances, analysis, research and clear thinking. With more than 6000 stocks listed on the Bombay Stock Exchange and the National Stock Exchange, the choice may not be easy.
A crucial thing to remember is that no two stocks are the same. Some stocks are meant for short-term investment while others require long-term commitment. Additionally some stocks may be more immune to market cycles, while the prices of others rise and fall as per broad market movements.
For these reasons, you should be properly informed about how to pick stocks that suit your investment goals and portfolio.
Also Read: The Benefits of Investing in Stocks
While there is no foolproof method to ensure that the stocks you select deliver assured returns, you can use some tried and tested techniques to pick stocks that could potentially accelerate rather than restrict the growth of your capital. Here are 6 such steps to give you more clarity about how to pick stocks for your portfolio.
Defining your financial goal is the first step of stock picking. You should first be clear to yourself as to what your investment plan is. Are you there for short-term trading or a long-term investment? Capital appreciation only or additional dividends also? These are some of the questions that you will have to answer first when determining your financial goals. Once you are sure about your financial goals, you can then pick the right stock that matches your plan.
Your risk profile is another major factor that can shape the way you pick stocks. Risk profiles can be classified broadly into three types – aggressive, moderate and conservative. An investor with an aggressive risk profile picks highly-risky stocks, whereas a conservative investor prefers fundamentally strong stocks with low risk. Meanwhile, an investor with a moderate risk profile has a healthy mix of both kinds of stocks.
Knowing the direction in which the market is moving can help you pick stocks more effectively since most of them simply move with the market. Purchasing when the market is bullish may increase your chances of long-term wealth creation.
That said, keep an eye out for events that may cause temporary spikes in volatility and price corrections like the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting and Union Budget announcements.
Once you’ve determined the market direction, the next step is to shortlist sectors and industries that you prefer to pick stocks from. If you’re a risk-aggressive investor, consider stocks from emerging industries with high growth potential.
On the other hand, if you’re a more moderate or conservative investor, you may want to stick to essential and more well-established sectors like banking and financial services, Information Technology and consumer goods. Consider using sector-wise market indices to gauge and compare the performance of sectors.
Upon determining the sectors in which you would like to invest in, the next step is to conduct thorough research into the companies that operate within the chosen sectors. When researching a stock, make sure to properly understand the company’s business and its products and services. While you’re at it, remember to pay attention to the corporate governance aspects well.
Perform extensive fundamental analysis on each stock within the sector individually and compare the results with one another and the industry average. This should help you easily pick stocks you need to invest in to reach your financial goal.
Diversification is a crucial step many investors miss when selecting stocks. It is one of the best investment strategies that can help you lower portfolio risk. The idea behind the strategy is to invest in stocks across different sectors, industries and market capitalisations. This may help reduce the negative impact of a falling market on your portfolio and could even boost your wealth creation potential in the long run.
Also Read: What are Shares – Meaning & Types of Shares
It is a crucial first step in the investment world that you know how to pick stocks that could do good for your portfolio. You should be clear about investment goals only then can you pick stocks that are best for you. Do not adopt a random approach and always do your homework meticulously.
To make your trading and investment journey more rewarding, you need to choose a trusted stock broker like Bajaj Broking. We not only offer seamless demat and trading account opening options, but also support you in your endeavor to make informed trading decisions and help you pick stocks that align with your goals.
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