How to Choose Good Stocks
New investors to the stock market usually ask the more experienced trade professionals, "Do you have a good pick?" With the correct tools, a beginning investor will be able to confidently choose a stock using charts and other resources that are readily available. Being educated in market trends, chart reading and Level II quotes will help the investor make profitable decisions.
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Instructions
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Find a chart for the stock you are considering for an investment. Charts can be read in daily, weekly, monthly or yearly figures. Learning how to read the stock chart can reveal when to "buy low and sell high." Follow chart patterns such as "head and shoulders" or "cup and handle" to help predict a stock's general trend. A "cup and handle" trend is when a stock tests its old highs (high side of cup) and begins to downtrend. At this point the stock trades sideways for a bit (the cup) before climbing again. A "head and shoulders" pattern shows when traders sell a stock after it reaches new highs, causing it to downtrend. When the stock hits a low, (the shoulder) new buyers invest in the stock to push it up to create a new high (the head). The RSI (relative strength index) is another indicator of a stock's direction. In theory, when a stock drops below the RSI line, it is oversold and undervalued--and ready to be purchased in anticipation of future gains.
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Pay attention to the media. Read the financial sections of newspapers and follow broadcast and online sources. Bad publicity for a major publicly traded corporation, including reports that it missed its profit targets or is named in a major lawsuit, may cause its stock to lose value. Good news, such as beating profit targets, have the opposite effect, Emerging companies receiving favorable reviews from financial experts tend to open well on the market and experience gains.
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Use Level II quotes to show the bid and ask prices for stocks. Level II's show how many institutions are lined up to either purchase a stock or to sell it. The depth of the sellers informs an investor of a base that the stock usually settles in. The number of buyers will usually show how high a stock will go--the cap-- before it levels off. Varying factors determine whether or not a stock will "break through" the base or cap.
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Tips & Warnings
Search through various stock message boards to get a grasp of what is happening behind the scenes with other investors.
Paper trading is also a method used by beginners when they are learning chart reading and other technical details about investing. Follow a certain stock for a month, writing down when you would have invested, sold etc using charts. At the end of the month, tally your gain or loss.
Be wary of rumors about stock trends on stock message boards. Some forum contributors are paid to either hype or bash a stock, in order to get investors to buy or sell.
OTC (penny) stocks are not regulated by the SEC, and as such are often manipulated unfairly.
Chart and technical readings are not 100 percent accurate predictors of a stock's behavior. Rumors, bad financial reports and other factors weigh on the stock's ultimate course.
Never invest with money you can't afford to lose.
References
Resources
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