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8 Crucial Factors When Shortlisting Stocks for Trading Success

By: Becky Wilson

 

Stock exchange market concept, Business investor trading or stock brokers having a planning and analyzing with display screen and pointing on the data presented and deal on a stock exchange.

If you are a new trader, it is easy to get bombarded with a myriad of information on the markets, operating strategies, and how to make money on the stock market. It is vitally important that you choose stocks that suit your needs, your goals, and your level of risk appetite. That’s where the concept of shortlisting stocks comes into play.

Excessive losses on the stock market can be prevented if, when purchasing a share certificate, it is immediately determined that the security will be sold automatically as soon as it falls below a specified value (stop loss).

Conversely, there is the possibility of setting limits at which additional purchases are made – for example, if shares fall below a certain value and are then cheap (start buy). Selling limits in the event of price increases can also be helpful – after all, every investor has become impoverished by taking price gains.

Even so, a few key strategies, as listed below, can help forestall the probabilities of loss by a significant percentage.

1. Financial market factors

The key to profitability when day trading for a living is a market analysis that exploits the information available to forecast trends and create a methodology for entry and exit levels.

Only buy what you understand. Buying shares without information is like driving a car with your eyes closed – at some point, it will crash. Therefore, it is advisable to acquire solid basic knowledge of securities and the capital market and deal intensively with the selected companies and sectors. Leveraging an AI analysis tool like UVest4U can significantly enhance the precision of market analysis, empowering traders to make informed decisions based on data-driven insights.

2. Price-earnings ratio (P/E)

To calculate the P/E, the price of a share is divided by the earnings per share. For example, If the XYZ share is 100 USD and a profit of 10 Euros per share, the price-earnings ratio is 10. The following applies: A high price-earnings ratio compared to the average value indicates an expensive security, and a low one for a cheap one.

3. Price-to-book ratio (P/BV)

This value shows the multiplier with which a company’s material value is valued. If the price-to-book ratio is less than 1, a company’s total assets are higher than its stock market value, and the stock is cheap.

4. Dividend Yield

To calculate this metric, divide the dividend by the stock price and multiply by 100. The figure determined indicates the dividend yield in percent. A high value is considered a sign that a share is undervalued. Caution: A falling share price also increases this return.

5. Projected profitability

Consider a business’s financial status, earnings, year-long operating margins, and liquidity. These factors shed light on a company’s financial health and what you stand to gain if you invest in the short term in the near term.

When it comes to earnings, you must look at the company’s trending performance in the past. Choose company stocks with the highest operating margins, indicating better cash flow and, consequently, more profitability.

6. Capital structure

Debt or equity are the primary ways a company funds its day-to-day operations. Choose stocks from companies with a conservative capital structure, indicating that the company achieves the highest liquidity without ballooning its debt through efficient capital allocation.

7. Asset utilization

This ratio looks at the revenue the company earns for each dollar asset it owns and is an essential consideration factor when choosing profitable stocks. If a company has an asset utilization of 50%, it earns 50 cents per dollar of its assets. A higher ratio is more favorable.

8. Earnings Momentum

The company’s present or past earnings are critical when choosing stocks as they indicate their past, present, and possible future performance. To identify the best stock, analyze the company’s earnings momentum to visualize whether their earnings slump or accelerate and under what factors.

Find patterns by analyzing earnings reports for the companies you the previous quarters and reviewing analysts’ future earnings projections for the business. If a company posted the best earnings five years and not the previous year, it may not be a worthwhile stock.

Conclusion

Everyone has to decide for themselves what the decision to buy a share is ultimately based on. This also means dealing intensively with trading decisions. A single metric or information should never be used as the sole basis for investing.

Published: August 2, 2023
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Becky Wilson

Becky Wilson is a writing enthusiast with a deep interest in topics related to Financial Institutions. Spending a good amount of time researching around the same, whenever possible Becky also likes sharing the useful information with people who may find it helpful.

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