How to Pick Stocks in Stock Market?

Introduction

Trading in the stock market begins with a Demat account and an online trading account. But, the real journey begins after this - a journey where most investors endure more losses than profits.

Have you ever wondered who takes away all your money from the market? Yes, you are right! It’s the ace investors. Back of the envelope calculations suggest that 5% of investors profit because 95% of investors lose their money in the market. 

You are at the right place if you want to learn about the best ways to pick stocks to turn your never-ending losses into gravity-defying profits. This article introduces you to the concept of value investing and provides time-tested tips to find and invest in the best stocks. 

Tips to Pick Stocks With a Potential to Outperform The Market

Ace investors follow some rules while picking solid stocks and earning gravity-defying profits. By following the footsteps of top investors, you can make considerable profits from the stock market. 

1. Goal Setting is Vital

All informed investors know the importance of goal setting in the stock market. A stock market is a place of wild volatility, and having a clear cut goal is crucial to approach the market in the best way possible. 

If you are young, you can take more risks and pick high-growth stocks. A high growth stock’s valuation is often higher than its peers. These stocks outperform the market when the conditions are ripe. But, if the conditions are unfavourable, they might tumble within minutes. 

Since investor participation in high-growth stocks is high, they are more sensitive to the crowd mentality. If too many people think similarly, the stock will defy logic and go in the direction investors want it to go. 

However, if you are near your retirement age and most likely want capital protection, value stocks may be your best bet. 

Value stocks are underperforming stocks with immense potential to rise rapidly. Since value stocks are usually less pricey than high-growth stocks, you can expect dividends and bonuses from them. However, the difference between a value stock and a cheap stock is often subtle, and you may need more knowledge to isolate a value stock from a collection of cheap stocks. 

Hence, setting your goal is the first step to creating a rewarding portfolio.  

2. Fundamentals or Technicals - Turn The Odds in Your Favour

You can divide ace investors into two segments. Some rely on fundamental analysis to pick solid stocks, while others depend on technical analysis to choose the best stocks. 

Fundamental analysis involves analysing the balance sheet, cash flow, business prospects, events, Earnings Per Share (EPS), and management quality to predict the stock’s growth potential.

In contrast, technical analysis refers to chart analysis for predicting the stock’s future direction. Technical analysts are of two types - price-action traders and indicator-based traders. 

Price-action traders draw support and resistance lines on the chart and guess the levels from where the price may bounce back or retrace. They sell when the stock price is near the support line and sell when the price nears the resistance line. 

Indicator-based traders apply various indicators like RSI, MACD, OBV, Stochastic Oscillator, etc., to pick stocks and place trades. 

Hence, if you want to pick stocks like a pro, having some idea about fundamental or technical analysis is imperative. 

3. Profits Matter

Whether you trust high-growth investing or value investing, you must invest in companies that are on a steady growth path. You can evaluate a company based on its earnings over the years. 

Value companies generally increase their profits year after year, and it does not matter how much the growth is, as long as the company keeps increasing its profits. 

Top investors compare the company’s results with its EPS to figure out its potential. If a company has exhibited strong financial growth and yet the EPS hasn’t improved much, the stock might not be investors’ favourite. Since earnings and valuations go hand in hand, underperformance by any parameter indicates something wrong and must make you cautious. 

Companies publish an annual reports on their websites. You can head to the ‘Investor Relations’ tab to download the latest annual report and scan the performance before investing. 

4. Diversification Saves The Day

Quite often, you may feel the urge to place all your money in one stock because you are one hundred per cent sure that the stock will perform well. But, stocks perform the way they do for several reasons. While some reasons are in companies' control, others are not. For example, if there is news about some war, the capital market may crash globally, and your stock may tumble without any apparent fault of its own.

To reduce the chances of capital loss, professional investors divide their money between large, mid, and small-cap stocks and debt mutual funds. Generally, when the capital market goes into distress, investors pull out their money from equities and invest in debt. Hence, debt instruments' value increases when the equity market goes southward.

Diversification allows you to reduce capital risks and maximise profits.

The EndNote

Finding the right stock requires patience, understanding, and the right broker. 5paisa publishes research notes and top picks to help you choose the best stocks and make profits like ace investors. 5paisa experience no-frills trading and seamless capital growth.