Developing a list of strong buy stocks is a function of screening the thousands of stocks available by the fundamental and technical indicators judged best in measuring market strength. Traders should always use such a list as a disciplined way to trade. Trading candidates should be ordered with respect to stock strength, sector diversification and volatility.
Developing a Trading List of Stock Strength
Trading lists should be created from both technical and fundamental factors as well as from different market sectors. Always choose stocks with financial strength that have the means to grow and grow at rapid rates. Consider ratios such as current assets divided by current liabilities, cash to current assets, total debt to market capitalisation (capitalisation is the current stock price multiplied by the number of shares outstanding) and book value as indicators of strong companies.
Use P/E Ratios for Relative Value
Relative value is a measure of how expensive or how inexpensive a stock is relative to its historical trend. The easiest measure is to compute a price to earnings (P/E) ratio. Take the current price of a stock and divide by the expected earnings for the current year. Compare the current P/E ratio to historical P/E ratios. Consider earnings estimates for the next five years and compute future P/E ratios. Try to buy future earnings cheaply by purchasing stocks at the low end of the P/E scale.
Use Technical Indicators to Time Stock List Purchases
Compute the current stock price relative to a stock's 200 and 50 day moving average. If the stock is above one or both moving averages, the stock is in a range where traditionally stocks begin to rise in price. Use moving averages to hone the list of good stocks that are ready to trend in price.
Use Sector Classification to Find Good Stocks
When investigating stocks, know to what industry or sector they belong. Usually if two or more stocks in an industry are showing strength and price appreciation, most of the stocks in that group will rise. Consequently, be aware that a good portfolio is diversified among many industries. If your stock list shows strength in a particular group, investigate the group carefully and use your stock list to find the best stock in the group.
Stock List Caveats
Use screening tools, such as the one listed in the References section, to make finding stocks easier. Understand that the historical data used may be incorrect or inaccurate. Always use a stock screen as a beginning step in trading stocks, not a last step. Check annual reports and stock filings to see if there are any one-time charges or lawsuits affecting a stock price. Consult quality subscription services or research professional investment advice. Always use stop or limit losses to keep small losses from becoming large losses.
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