Tips for Picking a Profitable Stock.

Before we start with this article, do check out my previous article on the stock market in which I have explained the basics. Here is the link for that article: Everything about the stock market. Stock picking is a very complicated process and each investor has different approaches and opinion. However, by following general steps, investors can minimize the risk of the investments. So let's get started with basic steps for picking high-performance stocks.

Step 1. First and foremost, always decide the time frame and the general strategy of the investment. 

If you decide to be a long term investor, find stocks that have sustainable competitive advantages along with stable growth. The key to finding these stocks is by simply doing S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.

If you decide to be a short term investor, you can use one of the following strategies:

a. Momentum Trading. In this strategy, the trader looks for stocks that increase in both price and volume over the recent past. Most technical analysis support this trading strategy. You can simply look for stocks that have demonstrated stable and smooth rises in their prices. 

b. Contrarian Strategy. This strategy looks for very strong market crashes in the stock market. Basically, prices do not always accurately represent the values of the stocks. Sometimes, the price gets influenced by market conditions. For example, if the stock drops 20% after the company performs badly during the quarter that has no permanent damage to the business’s brand and product, you can be confident that the market over-reacted. It works just like a value investment strategy wherein the investor buys blue-chip stocks or fundamentally strong stocks at a discounted price.

Step 2. Check the fundamentals and basic ratios of stocks such as Price to book value(PB Ratio), Price to Earnings(PE Ratio), Dividend Yield, Sector PE, Return on Equity(ROE Ratio), Return on Capital Employed(ROCE Ratio), Promoter Holding and many others that give you a selection of stocks that is consistent with your investment time frame and strategy. There are numerous stock screeners available online that can help you find stocks according to your needs. If you are from India, you can use apps like tickertape or moneycontrol. 

Step 3. Once the list of 'Stocks to Buy' is ready, diversify them in a way that gives the greatest reward/risk ratio. This step is very important because diversification is one of the free lunches in the investment world. So, for every investment, don't put your all eggs in one basket.

These three steps should get you started to consistently make money in the stock market. Personally, I would always suggest a long term value investment strategy because major investors and the big bull of the market like Mr Warren Buffett and Mr Rakesh Jhunjhunwala has made very high returns by investing for a long term. I hope this article has provided valuable investment information and a sense of confidence that helps you make better trading and investment decisions. Let me know your thoughts on Stock market Investment by commenting below.