Golden Rules To Picking Best Stocks For Newbies

You don’t need to be a financial expert to make money from market. This is what I have been telling everybody but one question that I get quite often in my mail as well as in Do It Yourself Technical Analysis Members Forum area is – How do I pick the right stocks from thousands of stocks that are being traded in the market.

Let me answer this question with a very simple approach that I prefer.

To start with, you need to be a disciplined in the equity market. A disciplined trader or investor is the one who invests systematically at the right time in the right stock and at the right price with the right approach. If you are a new comer in the field of investments, you have to be extremely eager to learn it first. It requires your time and efforts to know about the basic trading tips and techniques.

Many a times I get a reply to the above question that I don’t have the time to learn and so can you handle things for me. My answer is NO because if you can educate yourself for 16 years for a Job, why can’t you educate yourself for 16 hours to make money from market. If you are ready to learn, you can pick up the preferred stocks by yourself with little efforts and understanding of the market? Of course it is true and here is a look on how to do it.

Step 1: Know the Basic

Understand the basic financial terms like investments, returns on the investment, equity, mutual funds, bond markets, CAGR, dividend etc. If you are thorough with this, you become an eligible trader in the market. Refer my blog for Stock Market Terms & Mutual Fund Terms.

Step 2: Search The Sector

Make a simple Google search to know the top industry sectors that are doing well in the present scenario. You can go through the expert calls made in several financial websites such as Bloomberg, moneycontrol etc. Assume, experts argue IT and FMCG sectors are going to witness an upward trend (for whatever reason), then narrow down the industry verticals in which you would like to do the investment. Apply your common sense (the one that I use is if a stock is doing good for last 1 year or rather 52 weeks, there is no reason for it to not perform for few more weeks) in analyzing the industry vertical performance so that you can eliminate the worst from your purview.

Step 3: The Patterns You Prefer

Assume you have narrowed down IT and FMCG sectors to invest in. Now do a similar search to find out the best companies to invest in each of those sectors. In our case it is IT and FMCG. Google and other top financial websites can help you to pick the best companies in the sectors.

Do a self-analysis and find out the percentage of returns given by these companies in the past 3,6,9 and 12 months. A simple view of the historical prices will give an idea about the performance of the company.

Now with the list of top companies in your armory, apply the technical patterns you prefer Investing. For me it is Break Out and Support and Resistance Pattern.

If you have zeroed in the top companies, sit back and closely watch their performances for a period of two or three months. Make sure to cover a wide range of companies, as you can understand more when you look at their reports. This will give you an idea on how to proceed from here.

Final Step: Start Investing

Start with a minimal investment. Make sure to have a stop loss value in all your trade and investment to trim your loses. It is the thumb rule to be followed for every trader and investor. Create your list of stocks and try to enhance your knowledge on your list of stocks. Add more stock to your list as you move along.

Make sure you create your own patterns or follow someone’s patterns that work in the market to find the best stocks.