If you want to start investing in the stock markets, the first thing to do is to learn how to choose the best stocks to add to your portfolio, as well as how to avoid making the simple, yet costly mistakes that can wipe out your trading account. Once you know how to choose the right stocks, remember to always monitor your positions and keep an eye on what’s going on in the stock markets – you can use an economic calendar and start doing some research about the best stocks to watch this week or month to spot any opportunities you could profit from!
Now let’s have a look at the best ways to choose the right stocks for your portfolio.
Analyze the level of your investing knowledge
Before you start picking stocks, you need to determine how knowledgeable you are about investing. Think about your general knowledge of the financial markets, as well as your understanding of how they work and how you can properly analyze them. As Warren Buffett used to say, “Risk comes from not knowing what you are doing“, so be sure you know what you’re doing. If you have to, take a trading training course to get yourself up to speed.
Determine your trading style
The next step is to determine your trading style, which depends on your trader profile. Think about your personality, your risk tolerance, your initial capital, your availability, as well as your financial goals to determine which kind of trader you are. This will help you understand how you’ll approach the markets (discretionary vs automated trading) and analyze them (technical vs fundamental analysis), which will, in turn, help you decide the kind of trading style you should adopt (scalping vs day trading vs swing trading vs position trading).
Set realistic goals
The trading style you choose should be consistent with your financial goals. But for this to work, you have to define specific, measurable, achievable, realistic, and time-bound goals (the SMART method). Therefore, it is important to determine your goals first, as different objectives will require different trading approaches and styles. There are, however, broader categories you could fit into, such as income-oriented investors, investors looking to preserve their wealth, and investors looking to increase their capital.
Once you’ve determined how much you need to improve your knowledge, what trading style to adopt, and what financial goals to pursue, you can write down your trading plan to include how you’ll enter and exit the markets, as well as how you will manage your positions. This process will also help you decide the way you will analyze the markets and pick the right stocks.
For instance, if you have sound knowledge of how to analyze financial data from companies, like financial ratios and other metrics, and that you’re looking for wealth preservation, you could use fundamental analysis to invest in value stocks. If you have a high tolerance for risk and you’re looking for an increase in capital, you can invest in growth stocks. And if you want to invest in volatile, very cheap stocks, you can trade micro cap stocks or penny stocks.