There are many options in the stock market, and for an inexperienced investor it can sometimes be hard to know what to look for. This article is intended for beginning investors, but also for others that want to understand what goes into stock picking.

Long term vs. short term investments

After getting an investment account, the investor may start building an investment portfolio. The portfolio can be built up by different asset classes such as stocks, bonds, currency, etc. This article is mainly about stocks, and of the things that go into stock picking.

Maybe the first thing an investor needs to decide for when building an investment portfolio is the time frame for the investment. If the time frame is clear from the beginning, expectations may easier be set for return. A shorter term stock pick may give return quicker than a longer term, but at the same time, a short term stock pick might come with higher risk. For a beginning investor, it is always recommended to have a longer time frame for investments, since this will both decrease the risk of making errors in judgement, and it will allow the investor getting used to the market.

There are no set numbers for what a long term vs. short term investment is, however, one might say that 6-18 months is a shorter time frame, and everything above that could be considered a longer time frame. It should be noted, however, that there are also market opportunities in the short term, and these should not be overlooked once identified.

Deciding for a sector

One thing that a beginning investor could start with is examining what sector to invest in. The investor could pick stocks from only one industry, or, stocks from several sectors. The benefit of picking stocks from several sectors is the spread of risk; if one sector performs bad, another might perform better.

Examples of industries and sectors are banking, transportation, retail, financial services, real estate, technology, etc. Different industries behave differently depending on market conditions. To illustrate this, during the lock downs that happened in 2020 many companies went bankrupt; some industries were hit harder than others. However, sectors such as technology experienced high growth, partly due to people doing remote work.

To get a better understanding for the connection between sectors and stocks, it is advised to learn about how different industries perform in different market conditions. Some sectors might perform along index, while others are cyclical. The pick of sector becomes as important as the pick of stock in a sense, since the two are interrelated.

Stock price and value investing

To find stocks that are worth investing in one can look for stocks in promising industries as mentioned earlier. When one have identified the sector one wants to invest in, one can start looking at individual stocks. Generally, proponents such as Warren Buffet advises against buying “stocks”, and instead recommends viewing the purchase as buying part of a company. This is synonymous with, and has also been called, value investing.

The stock price is an important, if not determining, factor when choosing stocks. Stock prices fluctuate, however, most of the time there is equilibrium between market expectations and the price of a stock. To clarify, if the price of a stock is too low in comparison to what is expected of that stock/company, then the price will be bid up by market actors and reach its equilibrium level.

Even though rare, there can exist information that a larger part of the market have missed, so that the market expectations do not fully represent the true value of a stock/company. With other words, there can be information asymmetry between a company and its external actors. The investor can then use this information to purchase stocks with good value. The extreme case of this is insider trading. Insider trading is when somebody from a company leaks information about internal business dealings that are unknown to the public. This information is then used to either buy or sell stocks. Watching closely for new developments and information in the market can make the timing of buying into a company more advantageous.

Lastly, there are many different ways of finding good value stocks, and no one way will work for all. However, doing market research before picking a stock will most probably increase chances of success. By researching the market and examining several stocks and sectors for different signals before making the decision to buy, one can be put in a better position to find good value stocks. The investor should decide what important signals or marks to look for when researching stocks. News, company websites, and websites with stock data can all be used as resources for doing market research.

Conclusion

Even though it is advised for a beginning investor to invest more long term to prevent mistakes from being made, short term opportunities should not be overlooked once identified. Different sectors have their own characteristics and can provide the investor with different opportunities. Individual stocks will usually behave according to their sector. There can also exist information asymmetry in a market, and if identified, the investor can use this for purchasing stocks with good value.