Financial market experts agree that it is difficult to identify stocks that outperform the market. That’s why investors often put their money in index funds, an easy way to build a diversified portfolio while ensuring it will at least match market returns.
An analysis of the site Morning Brew, however, says that many savvy investors, after building a diversified portfolio, still want to invest in companies that they believe will be very successful. The question is how to spot those stocks before their values skyrocket, like Amazon.
On the last day of 2005, a few months after the launch of Amazon Prime, the stock was trading at $47; now they are worth over 3,000, which is more than 6,000 percent.
The publication says that an investor should not invest in stocks for the simple fact that he thinks he will get rich overnight, because that is speculating.
You should search, carefully analyze, and until then, invest in stocks because you like to study the financial markets, have some money to lose, and want to have fun.
Fundamental Analysis
Investors take a fundamental, technical, or mixed approach to analyzing stocks. The first involves determining the intrinsic value of the company from the bottom up, from examining historical financial statements to imagining the future.
Then you compare your estimate to the current price and decide if it’s a good buy. That is opposed to technical analysis, which takes a more “dispassionate” approach. It’s more about finding patterns in stock prices that investors can exploit.
In general, fundamental analysts look for long-term investments, where technical analysts want to make quick profits.
Morning Brew says take a look at the company’s financials before investing. Stock exchange companies publish their results every quarter, which is when investors compare their expectations with the real performance of the company and decide to buy, hold or sell. Therefore, there is a higher volume of operations during the reporting season.
You must take the pulse of a company by looking at its liquidity and profitability ratios, which are only valuable when compared to a benchmark, either with competitors or with the industry. But there’s more to a stock’s price than just numbers. Much of what is built into the price is expectations about the future, from new products to changing market conditions. Valuations of some companies, like Tesla’s, are largely based on sentiment and expectations.
According to analysts, some aspects must be taken into account to know if the action is good or not. These include competitive advantage; its growth prospects and positive consumer sentiment, among others.