Spot the Right Stocks to Trade
If everyone could pick the right stocks to trade, investing would be much easier wouldn’t it? Unfortunately, things don’t quite work out this way, but don’t fret––we have some tips here to help you spot the right stock for your portfolio.
First things first, what are your plans going into this investment portfolio?
Before you even get to the stage of picking specific stocks in your portfolio, you must first decide on what you are hoping to accomplish with your investment portfolio. Of course you want to make money, but in what timeframe are you hoping to do so? Are you investing for the long or short-term? What other goals might you have? Are you looking for income generating assets, or capital appreciating stocks? As we discussed in a
previous article, picking the right asset class for you could also depend on your stage of life.
Once you’ve decided on your investment goals, you must realize the difference between short and long-term investments.
Typically, long-term investments are viewed as passive investments. These can offer low-risk stocks for investors with minimal knowledge, as well as those who are knowledgeable. Active trading can be used to realize short-term gains but there are much greater complexities when it comes to active trading, as well as inherent risk. That’s not to say that short-term investments can’t have low risk, but generally the risk is higher. Consider this example where a short-term investment may not be as risky as it appears. Say that the stock of a particular company is currently undervalued and it is quite apparent based on your valuation, then this could be a low risk investment. Once the stock price returns to its normal levels, then you can cash in and be on your way. We will briefly mention some valuation techniques later on.
Have you considered the other securities that comprise your investment portfolio?
Consider your current portfolio. Since we know that diversification is key, you won’t want to invest too much in a particular sector where you are already holding securities. Think about it, if you have all your money in one industry and the market drops, then your entire portfolio is exposed to unnecessary risk. The alternative is a situation where you are widely diversified across industries and the drop in one industry is balanced out by the rise in others. That said, it’s important that you know when to pass, as well as knowing when it is appropriate to act on a good deal and swap out a previously held stock in the same industry.
What are some valuation techniques that you can use?
Without getting too much into the technical details, here are a couple of valuation techniques that you can take advantage of:
Dividend discount model. This model assumes that the value of the company is equal to all of its future dividend payments. Of course, you will need to consider the time value of money to properly discount these future payments, but we will leave that there for now.
Price-earnings ratio. This second model compares a company’s current stock price to its earnings per share. From these two values, you will get a ratio value which can be compared to other companies in the industry. Typically, you will want to invest in stocks with higher P/E ratios.
The most important thing to understand is that these techniques should not be used on their own. Rather, you should use multiple valuation techniques as each one tells you something different. To find out about the mechanics of these valuation techniques and others, be sure to learn about all the ways Rich Dad Education can help you reach your goals.
You can level the stock market playing field once you know what the professional traders know. Our Rich Dad Education instructors will introduce you to trading strategies that produce potential profit when stock prices are falling in order to lock-in gains, reduce risk, and squeeze extra money out of stocks in your portfolio.
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