A random selection of stocks has a 50% chance of being the right one. How? By simply following the rule of probability. However, proper analysis and strategy can help you increase the chances of picking a winning stock.
You can choose a winning stock in a variety of ways. You might teach a chimp to pick a random portfolio by throwing darts at the financial column of a daily. The chimp would win roughly half of the time against Wall Street.
There are, however, simpler ways to choose winning stocks if training chimps isn’t your style or you can’t access a newspaper. Furthermore, as an independent investor with a long-term investment view, you have an advantage over Wall Street’s short-term emphasis.
While there are several reasons, one lesser-known reason for this is ‘random reinforcement.’
You might start trading by looking at the big names in the market. You see a certain cryptocurrency or a stock doing well, make a few random trades, and make a profit. However, the market will ‘punish’ this impulsive behavior and you will eventually lose your capital.
Do you see the problem here? You are trading without a trading plan and no risk management mechanism. The market has a propensity to reward bad habits while punishing beneficial ones.
In this article, we will give you five tips to pick the winning stocks. These tips will help you in both winning stock and winning crypto trading.
5 Tips How to Pick Winning Stocks:
1. Look at the Price to Earnings Ratio
We know you have heard that before. However, we cannot emphasize enough the importance of comparing the P/E ratio of currencies that you are likely to invest in.
P/E ratio is a popular and commonly used parameter to determine whether a stock is overpriced. It is the ratio between the current price of a stock and earnings per share. It helps determine the amount of money you need to invest to receive a part of a company’s profits.
In crypto trading, the P/E ratio is applicable for decentralized exchanges (DEX). Decentralized exchanges are essentially direct transactions that take place online without needing a ‘middleman.’ In crypto trading, P/E is the ratio of Market Cap and Total Earnings. Here, total earnings are a product of 24-hour volume annualized and liquidity provider rate.
The rules for analyzing the P/E ratio for stocks and cryptocurrency are the same.
A high price-to-earnings ratio indicates growth stocks. Although it points to positive future results, and you might agree to pay a higher price for growth in the future. The disadvantage is that growth stocks are frequently more volatile. This pressurizes firms to perform better in order to explain their greater price.
As a result, growth-winning stocks are more likely seen as hazardous investments. Such stocks are also frequently overvalued.
Investors consider firms with a low price-to-earnings ratio as Value Stocks. It suggests that they are undervalued with regard to its fundamentals. Investing in such stocks is a wonderful deal because when the market readjusts its price, you will make a profit from the increased winning stock price.
2. Look Out for Free Cash Flow
Free cash flow is the amount of money left with a company after it has taken care of payrolls and taxes. It is a much better parameter than the P/E ratio to measure a company’s worth for several reasons.
First, unlike earnings, cash flow cannot be falsified.
Second, cash flow decides if a firm can keep paying its dividend to its investors. For corporations intending to make purchases or repurchases, cash flow is also critical. It indicates whether a company is capable of paying debts, dividends, and facilitating business growth.
For example, you might want to buy MATIC for your cryptocurrency trading. MATIC is the polygon’s own token and is currently the 17th largest cryptocurrency right now.
To determine if you are making the right investment, you should look at Polygon’s free cash flow. As seen above, Polygon’s cash flow has been following a somewhat sinusoidal path between 2014 to 2020. It indicates that buying MATIC is a good investment and is likely to give good returns in the future. However, it might not be the best investment owing to the cash flow ups and downs.
3. Understand the Importance of Supply
Investors seldom look at supply as a parameter to pick a winning stock. Demand is considered a better indicator of how much profit a stock might get you.
In times of stability, nailing a demand forecast, which is dependent on multiple uncertain, very human aspects, is difficult enough. When you add in a black swan catastrophe like a worldwide epidemic, which has completely changed consumer psychology, it becomes even more difficult.
Predicting supply is easier than forecasting demand.
Invest time on the supply side and predict how much additional potential is flowing into the sector or a certain sub-segment. It gives far more meaningful data than attempting to predict the level of demand increase.
Demand projections are invariably based on guesswork, whereas supply is often predicted with a high degree of accuracy.
When the supply of goods and services expands while demand remains constant, costs generally fall to a lower equilibrium value and a larger equilibrium volume of products and services. When the supply of goods and services reduces while demand remains steady, prices are likely to climb to a greater equilibrium price and a lower amount of goods and services.
4. Keep an Eye on Momentum
Positive change is what momentum investors are looking for. They like seeing businesses outperform earnings projections, as well as price fluctuations and trade volume rises. We enjoy observing momentum. Companies that outperform earnings expectations, with soaring stock values and demand, get our pulses pounding.
Even better if you combine this with fresh highs in the winning stock.
This isn’t a brand-new investment technique. This method’s principles are built on the financial concept of minimizing your losses and riding your gains. In other words, the idea of momentum investing argues that short-term behavior repeats itself, with winners remaining winners and losers remaining losers.
When price action momentum is strong, it is totally based. When a stock’s price moves in a broad range in a short amount of time, it is said to have high momentum.
5. Keep a Safety Margin
The final phase of in-stock selection is to purchase stocks that are trading at a discount to your prediction at a reasonable price. This is your safety margin. Insinoler words, if your evaluation is off, you’ll save a lot of money by buying considerably below market value. Warren Buffett’s success as an investor is also due to this factor.
You may not require a large safety margin for a stock with steady profits and a positive outlook. You’ll probably be alright if you take 10% off your desired price.
There’s no requirement to seek the lowest value for a stock. Believe in yourself that you completed the required research to make an informed judgment, and when the price appears reasonable, you should accept it.
If you follow the techniques outlined above and create a varied portfolio of stock picks from various industries, you’ll be likely to locate some profitable buys.
Hopefully, the aforementioned tips will help you put your finger on the winning stock that gives you maximum returns. Remember, even a trained chimp or a parakeet can help you select random stocks. These randomized winning stocks will be profitable for nearly half of the selections.
However, correct planning and calculated judgment will take you a long way in trading. When you disregard guidelines and perform deals against your better judgment, even a profitable trade will be unfruitful.
Traders may avoid the traps of random reinforcement, reduce ego and instinct. This will turn out lucrative by building a good strategy. That is how you become one of the 5% of traders that succeed. Financial literacy is paramount whether you are trading in winning stocks or cryptocurrency. Therefore, it is imperative that you do your research, consult market experts, and look for resources online.