How to Choose Stocks for Your Portfolio

Are you tired of watching the Sunday business programs on TV to get a few hot tips about which stocks to buy? Do you resent the fact that so many websites want you to pay large subscription fees for daily, weekly, and monthly stock picks? If you answered yes to either of those questions, it’s time to learn how to make your own picks. Fortunately, you don’t need to have a PhD in anything, a brokerage license, or years of trading experience to choose stocks for your portfolio. As with the paid services and TV gurus, there’s no guarantee that any of your selections will make or lose money. The goal is to use simple, old-fashioned techniques for creating a short-list of worthwhile companies. Here are a few general rules to get your list started.

Avoid Low Cap Shares

Unless you have many years of trading experience, avoid shares priced below $5. In most cases, their price action is just too volatile and unpredictable for inclusion in a relatively conservative portfolio. Another problem with these low-cost selections is that a good number of them are susceptible to going bust, or bankrupt. When you stick to prices well above the $5 mark, you’ll usually be dealing with companies that have been around a while, and not facing massive financial trouble, and have the potential to appreciate in value.

Use TA Techniques

Knowing how to use simple technical analysis on stocks can be an excellent way to find attractive candidates for buying. Two of the most frequently used TA (technical analysis) methods are moving averages and RS (resistance support) levels. One way of choosing stocks is to only purchase those with prices above the 200-day moving average, which tends to indicate an uptrend. With resistance and support, it is possible to look at recent charts, or perhaps six months, and see where prices have topped and bottomed out. That range can be called a high-low RS channel, with the upper line being resistance and the lower line being the support. Some investors only purchase shares that are within that six-month channel.

Use FA Principles

Fundamental analysis looks not so much at quantity as quality. An FA enthusiast will choose companies based on the experience of the management team, whether there are any lawsuits pending against the corporation, whether there has been recent bad news about earnings, or similar factors. Doing a full-scale FA study of any organization takes more time than running a few TA numbers, which is why some people shy away from the method. However, it can work very well on its own or in conjunction with TA if you are willing to devote the time to research your prospective purchases.

Stick with What You Know

If you have a particular area of expertise or special knowledge, consider working within that segment of the market. For instance, if you work in the construction industry, chances are you already have a solid foundation of knowledge about the corporations in that niche. That’s a great starting point for selecting portfolio candidates to invest in.