Are you are a share investing beginner with some cash to buy shares with?
Are you baffled and bamboozled by all the stock market jargon?
Are you frozen to the spot, like a rabbit in the headlights, not knowing which stock to buy first?
If you answered YES to these questions, then read on because this post is just for you!
In this post, I am going to highlight 7 different methods that you can use to pick stocks and shares.
Some are more complicated than others but all are available to the beginner.
What’s more, at the end of the post, I’ll tell you about 2 resources that you can use to get out of the headlights and avoid getting run over!
Sound good to you?
Let’s get started then…
1. Share Tips
This strategy is first on my list because it is the one that beginners use the most, not because it is the best one to use.
There is nothing wrong with following share tips of course.
I still do it myself and I consider myself an experienced investor nowadays.
However, I NEVER follow a share tip without doing my own research on the company first.
Blindly following share tips is the most fundamental mistake that beginners make, falling into the trap of believing that the tipster is an expert and therefore the shares can’t fail.
Well they can and they do!
Blindly following a share tip is like placing a bet on a horse at the races only it is more expensive because you have more money involved and your costs are higher.
Would you place a $500 bet or $1,000 bet on a horse just because someone told you about it?
Hopefully not – so don’t do this with shares either.
Instead of listening to anybody and everybody, have some confidence in your own mind and instinct and at least consider the source of your stock tip when deciding whether it is a good tip or not.
Reputable tips can be found in investment magazines, financial news media and web sites, etc. that you have heard of and have a strong track record.
If you like the sound of a stock tip, then do your own research as well before buying e.g. by examining the company’s web site and latest news.
You might also like to read this article on the subject of share tips.
2. What Do You Know, Like, Trust
You are a consumer of products and services sold by many companies on the stock market.
Which products and services do you know, like to use and trust to deliver the benefits for you?
Are they products and services that you think will continue to sell well in the future and do better than their competitors?
Thought of one?
Now find out which company sells these products or services.
If the company trades on the stock market (not all do) then consider buying some shares in the company.
The logic here is that if you like what the company does, then the chances are that other customers will too and the company will continue to do well.
If the business does well in the future then so will its share price (see this article for more on this).
3. Financial News
As well as picking up stock tips, reading the financial news is a habit that all investors should have.
For beginners, it is a great way to learn some of the jargon too.
You can also use it as a stock picking strategy.
That’s because this is where you will find out about the latest results of stock market companies and the latest news about them.
When you read about a company that has just published strong results or had some positive news, then it is worth adding to your watch list and doing some more research.
4. Directors Dealings
A well known strategy is to buy shares when the directors of a company are buying them.
The logic here is that the company directors have the most knowledge about the prospects of their own business.
Much more knowledge than gets published in the news or in the annual reports.
If the directors are willing to invest significant sums of their own cash into the business then they presumably expect the share price to rise from here.
This strategy works best when several directors are buying at the same time and investing large amounts of cash.
5. Financial Ratios
This method is the one that I use the most to identify an initial short list of shares to analyze further.
Some call it stock screening or data mining.
It involves filtering a long list of shares for data within a certain range of values.
For this reason, it is easiest to do this using software like I do if you possibly can (see later).
If you don’t have software, then you can still do this to some extent although it involves a lot more work for you.
Financial newspapers and web sites often publish tables of the most popular stock market shares.
In the tables, they often provide a column containing the Price to Earnings Ratio (P/E Ratio) and/or Dividend Yield for example.
These ratios are a great way to filter out the undervalued shares from their peers for your short list.
There are many other indicators you could use, of course, but you will need the data to be able to use them and most newspapers don’t publish it.
Another source therefore is your stock broker.
If you use an online broker, as I do and if you’ve chosen the right one, then they will publish results and data for the stocks you can buy through them.
The drawback here is that you will probably have to search companies one by one unless your broker offers a screening facility which a few of them do.
6. Chart Analysis
This method involves looking at share price charts to identify patterns that suggest a share price will rise from this point onwards.
For example, a historical graph of a company’s share price will help you identify turning points such as a falling price that is starting to turn upwards.
Or to identify shares which have been rising for a while in a narrow channel and may continue to rise.
Or to identify shares that keep bouncing up from a strong horizontal support line.
There are also some very sophisticated techniques for spotting patterns such flags, reverse head and shoulders, double bottoms, triple bottoms, etc.
However, as a pure mathematician, I am a bit skeptical about such fancy techniques.
Essentially these are short to medium trading techniques rather than medium to long term investment techniques.
Also, the past is no guarantee of the future because share prices are ultimately driven by the future prospects of the company’s business, not past share patterns.
However, they can be useful for timing your buys and sells which is what I use them for mainly.
To use charts, you will need to find them on a broker site, company web site or use some software with the right charting tools.
Even more sophisticated is the use of indicators.
Again, these are more for the sophisticated investor than the beginner but some of the simpler ones can be useful.
A good one is the Coppock indicator which is a way of reading a buy signal for a stock.
Another simple indicator is the use of two moving averages together to form a golden cross which is another buy signal.
There are lots of these indicators and more seem to emerge all the time.
Remember though that their name is a big clue – they are indicators, not certainties and so should never be used in isolation in my opinion.
However, there are some chart investors (chartists) that swear by them.
As a mathematician (yes, sorry to keep bringing this one up) I have to say that the weakness of these indicators are that they work best when few people use them.
The more people that use them, the less useful they become.
That’s because they start to drive the share price rather than reflect the share price.
A bit like the tail wagging the dog!
A prime example of this in the not too distant past was an investment company called Long Term Capital Management going bust.
It had won the Nobel Prize for inventing a new investment technique for predicting when to buy and sell shares.
It worked a treat to begin with but not when everyone else found out and started using it.
If you want to use indicators, you really will need to find some software that provides them for you.
Which Stock Picking Strategy Is Best?
The best strategy for you is likely to be the one that you find the easiest to understand and use!
For most beginners, this is probably going to involve 1, 2 and 3 and that is a great place to start.
Methods 5 and 6 are generally more useful because you can identify great opportunities at any time, not just when they are being written about in the news and brought to everyone’s attention.
They are also a way of finding shares before the newspapers and tipsters get hold of them which means you can usually buy the shares cheaper, before the feeding frenzy increases the share price with everyone following the share tip.
Another example of the less people that know the better!
Although, it’s great when a well-known tipster tips a share soon after you’ve bought it!
As a beginner, methods 6 and 7 are probably best avoided until you have mastered methods 1 to 5.
Personally, I use all 7 strategies in combination and at different times.
I can only do this on a practical level because I use some investment software and pay for a daily data feed from a provider.
Special Offer 1
I am based in the UK and use a piece of software and data provided by Sharescope.
I have used it for years and I use it to pick shares, monitor my share portfolio and everything.
Best of all, the software comes with ongoing support and updates as long as you continue to subscribe for the data feed which is priced very reasonably on a monthly or annual basis.
It contains all the UK listed shares as well as US Dow Jones, S&P 500 and NASDAQ shares and popular European shares too.
I’m not sure whether you can buy and use this software outside of the UK but I would expect you can if you wish as it runs on MS Windows but contact the company first to make sure.
If you are interested in checking it out, I have also negotiated a special offer for my readers.
As I said, I can highly recommend it, so go and take a look.
Special Offer 2
A relative newcomer to the world of stock market investment software is Stockopedia.
I’ve been using it since August 2013 (in addition to Sharescope) and I can recommend it too.
It’s major differentiator are its stock screening tools, guru screens and stock ranking methodology.
I’ve also negotiated a special “How To Invest In Shares” 25% discount off the regular subscription price, worth £50.
Well worth checking out too.