Selecting stock shares is not easy, but there are several reliable methods that almost anyone can use to narrow down an extensive roster of symbols and uncover a few worthy choices. Since the early 1900s, brokers, investors, and other interested parties have come up with numerous techniques for selecting stocks to add to a portfolio. In modern trading literature, there are more than 100 such strategies to choose from. They’re not equally effective, and some are designed for particular purposes, like identifying long-term, dividend-paying shares that are good candidates for retirement accounts. Other methods focus on discovering excellent growth companies.
However, there are a few common principles behind the vast majority of the approaches. Those principles include an emphasis on studying recent price activity, using a combination of technical analysis tools, keeping an eye on non-quantitative factors, trying to spot major trends, and working with lists of stocks that have delivered consistent returns for long periods of time. If you want to wade through hundreds of alphabetical share symbols and separate the wheat from the chaff, the following suggestions are a good way to begin.
Study Recent Price Action
One of the oldest tactics for choosing potentially profitable candidates dates back to the 1920 and the old ticker tape machines. Brokers would sit for hours watching the ebb and flow of prices, simply focusing on the patterns until they found a repetitive pattern of one kind or another. Often, this kind of pure price action analysis can yield good results. Those who use the system tend to look for recent highs and lows, areas of short-term support and resistance, and breakouts from one-year or two-year price ceilings or floors. If you find shares that offer easy to spot patterns, they can make suitable additions to a portfolio.
Use Multiple Technical Analysis Tools
Technical analysis tools such as TradingView are popular among new and experienced investors because they’re easy to understand. Every day, casual and professional equity enthusiasts use moving averages, momentum indicators, MACD (moving average convergence divergence), and dozens of other quantitative studies to see which companies make the most attractive buys.
Don’t Ignore Fundamentals
Before technical analysis became popular in the 1960s, most traders stuck to fundamentals, like the quality of a corporate management team, earnings-per-share, price earnings ratios, and other mostly qualitative characteristics to evaluate which candidates to add to portfolios. Using fundamental analysis and studies is mostly confined to long-term portfolio additions, but many people prefer to use price earnings and earnings-per-share as standard screening tools for paring down their lists of portfolio candidates.
Blues and Aristocrats
Some investors have combined fundamentals with data about proven track records by choosing stock issues that have paid out dividends for decades and delivered long-term value. Blue-chip stocks meet most of those kinds of qualifications and tend to be among the best-known of all. Dividend aristocrats are companies that have increased their dividends for 25 consecutive years and are already listed on the S&P 500 Index. Some mid-cap stocks are considered aristocrats if they are also listed members of the S&P MidCap 400 and have a history of increasing their dividends for at least 15 years.