Stock Selection for Beginners: A Guide to Identifying Profitable Investments

Identifying good stocks to invest in is a matter of tracking the relevant external conditions, the trends and the internal workings of the company or companies in question. Seen in concert, each of these factors will have a decisive effect on the value of any given company’s stock. Moreover, as an inexperienced investor, you should familiarize yourself with the differences between day trading and long-term investing.

Know Your Assets

Because stocks merely represent the claims that an investor has on a company’s assets, you should know what external conditions might affect the value of those particular assets. External conditions are factors occurring outside the direct control of the company or its management structure. Increasing cases of swine flu, for instance, had a detrimental effect on the value of stock for companies whose primary source of income is pork distribution. In this regard, identifying good stocks to invest in requires keeping an ear to the ground for relevant information that could directly affect a company’s assets.

Mark Your Trends

While there is no simple snapshot outlining the complicated web of influences that can affect the value of your shares, there are ways to identify and track some of the more direct influences such as social or economic trends. An example of this might be the rise in popularity of protein diets in the late 1990s. An investor with foresight might have seen this as a precursor to massive sale price increases by beef or chicken companies and, as a result, the increasing the value of their shares. Marking such trends and attempting to foresee their effects is a necessary skill to cultivate in order to identify good stocks for your investment. 

Know Your Company

One of the best lessons any investor can learn in looking for good stocks to invest in is that you should always have at least a fair understanding of the internal workings of the company whose stock you own.  All of the protein dieters in the world won’t save a beef grower and distributor if the company is poorly managed.  Moreover, if the management is unable to organize the company sufficiently to take advantage of trends like the one mentioned above, then their stock will achieve little upward momentum. 

Day Trading versus Long-Term Investing

Part of identifying good stocks to invest in is figuring out which of those stocks should serve as long-term investments and which are more volatile and shouldn‘t be considered long-term. All too often, investors become enamored with the money they are making with volatile day trading and begin to view their long-term investments with impatience. These investors often find that they cannot cultivate the patience to watch their long-term investments start to fall. They instead succumb to panic and sell their stocks prematurely. If you are this type, you may want to divide your investment budget carefully into two parts. Allot yourself a portion of your investments that you can alter frequently to satisfy that urge to react to the market, but leave the rest alone in long-term holdings.