“A picture is worth a thousand words” – unknown
Whenever I talk to prospective investors, they usually throw their hands up in the air and say they have a hard time picking stocks for the portfolio and they don’t even know where to start. That doesn’t really come as a surprise, as there are a lot of companies listed in the stock market. In the Philippines alone, we have about 288 listed and if you look internationally, there are over 40,000. I don’t know about you, but even going to the grocery aisle and sorting through brands can get tedious, what more if you have hundreds or thousands to choose from?
That said, I believe it is worth exploring the tools we have at our disposal to make such a monumental task even doable. First step, we have to use a stock screener. This is basically a tool used by investors to help narrow down their search for stocks that meet certain criteria. Screeners such as Finviz can help investors find stocks using criteria such as price, market capitalization, industry, and more.
An example would be where a user might use a stock screener to search for stocks that trade at a price-to-earnings ratio of less than 15 and a price-to-book value of less than 2. Or if one is more inclined to use Technical Analysis, an investor could use a stock screener to use indicators such as RSI, volume, and moving averages to identify stocks that are showing an increased demand and are likely to increase in value.
By using a stock screener, investors can quickly and easily identify stocks that meet their criteria, thereby saving time and energy when researching stocks.
On that note, I mentioned Technical Analysis, that is also another tool in an investor’s arsenal. For the unfamiliar, Technical Analysis is a method used by to study the behavior of prices and to make predictions about future price movements. It is based on the idea that the price action of a stock or other financial instrument is not random but instead follows certain patterns or trends. This means that by studying the past behavior of a stock, investors can gain insight into its future direction.
Technical analysis involves several different techniques for analyzing the price action and volume of a stock. These techniques can be divided into three broad categories: chart analysis, trend analysis, and volume analysis. Chart analysis looks at the historical data of a stock to identify patterns and trends. Trend analysis looks at the trend of a stock over time to identify potential entry and exit points. Volume analysis looks at the amount of trading activity of a stock to identify potential changes in price.
Delving into that toolset should allow investors to identify potential buying or selling opportunities in a variety of ways. I personally use it to identify potential entry and exit points for stocks – of course after using fundamental analysis to screen out the bad companies. I also use it to track if my strategies are yielding a rising equity curve – basically a graph that shows the growth of a portfolio over time. The equity curve is another valuable tool for understanding the performance of a strategy over a period of time and for making adjustments to the strategy if needed (Barsky, 2016).
Technical analysis is an important tool for stock market investors. It can be used to identify potential buying or selling opportunities, to understand the overall direction of the market, and to develop a portfolio management strategy. However, it is important to note that technical analysis is not a guarantee of success. It should be used in conjunction with fundamental analysis, which looks at the financials of a company. By combining these two approaches, investors can gain a better understanding of the stock market and make more informed decisions about their investments.
Tune in next week and we’ll try to explore fundamental analysis. Till then.
Disclaimer: Just a reminder, dear reader, that the content in this column is my opinion only and should not be construed as investment advice because I am not your financial adviser, neither did I take into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. This column is mainly for your entertainment and education only.
References:
Barsky, R. (2016). Equity curves: What are they and when should you use them? Retrieved from https://www.investopedia.com/articles/active-trading/092215/equity-curves-what-are-they-when-should-you-use-them.asp
Bos, P., & Bos, A. (2016). Technical Analysis for Dummies. Hoboken, NJ: John Wiley & Sons.
Roth, A. (2021). Technical Analysis: Analyzing Price Action and Volume. Investopedia. https://www.investopedia.com/terms/t/technicalanalysis.asp
Schwager, J. D. (2012). Technical Analysis Explained: The Successful Investor’s Guide to Spotting Investment Trends and Turning Points. New York, NY: McGraw-Hill Education.
Sweeney, M. (2021, May 24). What Is a Stock Screener and How Does It Work? Retrieved from https://www.investopedia.com/articles/active-trading/011715/what-stock-screener-and-how-does-it-work.asp