Stock picking strategies have been used by investors since the very early days of trading on the New York Stock Exchange and the other markets where stocks are bought and sold. Knowing how to pick a stock is a little bit of an art and a little bit of science. You can get lucky once in a while by simply following a hot tip, but most experienced investors follow some sort of plan or strategy before even considering the purchase of a new stock for their portfolio.

Doing your homework or research is probably the most important strategy for picking stock. The better informed you are about a specific company and their stock, the more likely you will be to select one that performs well in the future. There are two main ways to go about researching a stock before making an investment decision.

Fundamental Analysis for Stock Trading

Fundamental analysis involves examining all of the company’s financial records to be able to gain an understanding of their relative financial strength. It is important to know if a company has a lot of free cash on hand, if their debt is under good control and any number of other factors.

You can find out the price/earnings ratio and compare it to other companies in the same industry. Much of the data is easily available online or can be requested from the company itself. You will want to check the balance sheet and income statement and also find out as much as possible about the history of the company. You should read current articles about possible important upcoming events and know how the company operates on a day-to-day basis. Finally, and maybe most importantly, take a close look at management. Companies with superior management tend to out perform their competitors.

Technical Analysis or Charting for Stock Picking

Many investors follow the price movement of stocks and watch the formation of patterns over time. Technical analysis pays no attention to the fundamentals, but uses charts and graphs to forecast the future movement of a stock.

There are a series of indicators such as head and shoulder patterns, a steadily ascending stock price, volume of trade and a stock’s price breaking above the 200-day moving average. A skilled technical analyst can make some very accurate forecasts just by studying the graphic of price movement of a stock.

Stock Picking Strategy: Dogs of the Dow

This is a tried and true strategy that takes the guesswork out of knowing how to pick stocks to buy. The 30 stocks that comprise the Dow Jones Industrial Average are some of the world’s biggest and most important companies.

The strategy of investing in the one or two stocks that were the worst performers for the last full year often pays off big. Any number of reasons could cause a strong company not to perform well in a given year. When you buy one or several of the Dogs of the Dow, you will be getting it at a depressed price. These companies usually have a high dividend rate, which is an added bonus for those looking for price appreciation as well as dividend income.

Other Stock Picking Strategies

Knowing how to pick stocks is the first step toward becoming a successful stock investor. Besides the Dogs of the Dow strategy, you can focus on hot industries and long term trends.

• Some examples of long term trends include alternative energy and health care services for our aging population.
• Copy cat strategies like buying the same stocks billionaire investment guru Warren Buffet buys for his Berkshire Hathaway Fund also tend to work out well.

Stock Picking with Software

Traders and computer programmers have developed several specialized stock picking software programs that will either execute trades automatically for you, or alert you when certain thresholds deemed favorable about a certain equity have occurred, so that you can trade it yourself.

Doing well with software requires that you have a solid understanding of the fundamentals of the market, as well as why the software believes certain events are good: automation can help you scan hundreds or thousands more stocks than you would be able to do on your own, but you are only as good as your tools.

There are so many stock strategies out there that it really is best to do your homework and make your own decisions. As mentioned earlier, if you understand fundamental and technical analysis, you will be well ahead of the game when it comes to picking a specific stock or stocks.