There is no universal rule for the selection or the picking of stocks.
The method or strategy that you are going to use will be influenced by the reliability you give to the method.
Not only that but also on your risk tolerance and your time horizon. However, you should keep in mind that no investment strategy works one hundred percent of the time.
For most people, a passive management style should be favored, but for those who like the thrill of hitting right with your stock, you’ll like what you will read.
Active selection styles
- Value Investing:
This method has to be achieved by analyzing the financial reports of a company to arrive at a, although somewhat fictitious, share price.
Once you have the fictitious (or intrinsic value) price, you compare it with its share price on the market.
If the stock price is below, it means the stock is undervalued so you should buy it.
On the other hand, if the stock price is above the intrinsic value the stock is overvalued, so it’s not a good buy.
- Growth Investing:
In this style of investing, you favor enterprises that are in their early phase.
You bet on those companies hoping that they will have significant growth, creating an important capital gain for you.
Once these companies left the expansion phase and moved on to the maturity phase, you sell your shares.
Obviously, that’s not the only reason, because since those companies are in the early stages of their business lifecycle it could end abruptly.
You should therefore closely follow the company performance and the share price.
- Sector or Industry rotation:
Supporters of this strategy focus on investing in industries they believe will perform better in the near future.
This means that a greater part of the portfolio is invested in sectors whose expected return is beyond average.
- Momentum investing:
It is an investment style that follows the trend of the moment. As long as the trend persists, the flow of money continues to equities.
Once the trend is over, the influx of money ends and the shares are sold.
The historical and daily price of stocks is closely monitored to detect the start and end of a trend.
- Market Anomalies investing:
In this style of investing focus is given on taking advantage of the inefficiencies of the market. The market is as efficient as it could be but it happens in some instances that it is not.
If you want to have a thorough understanding of those anomalies you can read about them here.
I hope this article has been informative enough and helped you decide on a style of investing to follow for choosing your stocks and building your portfolio.
As I have said in the beginning there is no perfect investment style. The reason why is because those methods have outperformed one another at different periods.
So this makes it impossible to select a method that will bring you success for eternity.