Exercising The Best Stock Pick - How To Distinguish The Good Ones From The Bad Ones. | Investments

Exercising The Best Stock Pick - How To Distinguish The Good Ones From The Bad Ones.

Written by Eric Stein

Sunday, 24 January 2010 20:40

by EricStein

Making the best stock pick is the reason why a trader lives. He is forever analyzing figures and statistics to try and find that one elusive stock that will eventually make him a fortune and compensate for the times that he made a mistake.

The question remains: how do you find that perfect stock? Or does it simply not exist? Is it only luck when that will bring it your way?

For a day trader these questions don't really arise. He does not believe that the market can be predicted in the long run ' there are simply too many uncertainties. He would therefore concentrate on technical analysis to determine which stocks to buy today.

Technical analysis involves the statistical analysis of historical stock prices and volumes to try and determine a trend in the market. When a stock for example starts trading above its moving average, many day traders would buy it because they believe this is the start of a new trend.

Although long term traders sometimes also utilize indicators such as the moving average to reach a buying decision, they normally concentrate on what they call fundamental issues before deciding to buy a particular stock.

Their normal modus operandi is to study the financial statements of the company involved. The purpose of this is make an assessment of the future profitability of the company. Should they reach the conclusion that the company will make a good profit for a couple of years to come, they would then invest in such a stock.

The argument behind this is that the share price should in the end be related to the profitability of the company. In day to day trading rumors and speculation might cause the price to go up and down, but in the long run fundamental issues like profitability must have the final say in determining the price of a stock.

Many traders are therefore forever searching for new companies that will introduce a product to the market that will revolutionize a particular industry. The likelihood is good that such a company will take the market by storm and make huge profits, resulting in a dramatic increase in their stock price. If you find such a company, and they are indeed successful, it might well turn out to be the best stock pick you made in your life.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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