Identify Stocks - Possible BUY candidates
Correct stock selection is crucial for success...
We will cover few techniques to identify certain groups of stocks which bought at right time can provide good returns. The intent is to buy stocks (from certain specific groups) which exhibit certain characteristics to provide good reward for reasonable risk.
Considering we are not seasoned professional investors, following stock groups can provide us with a good start:
Considering we are not seasoned professional investors, following stock groups can provide us with a good start:
Various Groups and why we should select from these groups!
Group 1 : Index component list
Index group components:
1. S&P CNX Nifty (50 stocks)
2. S&P CNX 500 stocks
3. CNX Mid-Cap 200 stocks
4. CNX Small-Cap Index (100 stocks)
5. CNX 100 stocks
6. CNX 200 stocks
7. CNX Nifty Junior (50 stocks)
8. Nifty Mid-Cap 50 stocks
You can choose other specific groups such as CNX Sector Indexes, etc. You can find the complete list here.
Other Resources:
Money Control - Index Composition
All above factors provide us with confidence about the company as well as some stability for our investments. Even if the stock goes down, it has potential to come back ones the company performance and market internals get better.
Group 2 : Value / Growth investing
Successful and known value investor in India
Rakesh Jhunjhunwala (On left side under Gurus select this name to view current portfolio holdings)
Other resources:
Value Investing - Core Concepts
Popular Screeners
Group 3 : Income generation
Income generating stocks:
TOP Dividend Stocks
S&P CNX Nifty highest dividend stocksCNX
Dividend Opportunities Index
Index group components:
1. S&P CNX Nifty (50 stocks)
2. S&P CNX 500 stocks
3. CNX Mid-Cap 200 stocks
4. CNX Small-Cap Index (100 stocks)
5. CNX 100 stocks
6. CNX 200 stocks
7. CNX Nifty Junior (50 stocks)
8. Nifty Mid-Cap 50 stocks
You can choose other specific groups such as CNX Sector Indexes, etc. You can find the complete list here.
Other Resources:
Money Control - Index Composition
- Typically these companies are well established
- They have been around for couple of years
- Company performance data in terms of stock price, annual report, earnings, sales revenue, etc. is available for analysis
- Stock has enough volume liquidity, e.g. Daily Volume > 100,000
- Most important, these companies will not vanish in air in no time
- Typical holding period can be from 2-6 months to years
All above factors provide us with confidence about the company as well as some stability for our investments. Even if the stock goes down, it has potential to come back ones the company performance and market internals get better.
Group 2 : Value / Growth investing
Successful and known value investor in India
Rakesh Jhunjhunwala (On left side under Gurus select this name to view current portfolio holdings)
Other resources:
Value Investing - Core Concepts
Popular Screeners
- Follow the best investor for value investing
- We don't have to worry about fundamentals as they have been evaluated by the best investor, however it is advisable to understand value investing and do your homework
- Typically good investment for long term holding period
- If possible buy stock below their buy price point
- Holding period is typically more than 1 year
Group 3 : Income generation
Income generating stocks:
TOP Dividend Stocks
S&P CNX Nifty highest dividend stocksCNX
Dividend Opportunities Index
- Ideal investment to earn extra income from stocks
- Depending on dividend frequency we will generate income monthly/quarterly as long as we hold the stocks
- Even if the stock declines, we would have earned dividends which will help cover losses
- Stock may increase in price providing capital gains along with dividend income
- Typical holding period can be from 3-6 months to years
How to apply our Strategy?
So far we know where to start but these are many groups and each group has many stocks... CONFUSION!!!
Example of a mixed stock Portfolio
How to select stocks from each group?
In next section we will look at identifying potential stocks to BUY.
Obey the rules and practice discipline:
We need to be disciplined while trading stocks as stocks are very risky and one can loose our capital lot faster. Following are certain guidelines one should never forget while trading stocks to avoid significant losses.
How to select stocks and apply our Technique using base strategy:
Stock Breakout Pattern
- No need to get confused
- First we need to understand how to manage "Portfolio Position Sizing", this is very important to manage your risk and avoid big losses
Example of a mixed stock Portfolio
- 20% in Income generating stocks - dividend stocks (long term)
- 20% in Value stocks (long term)
- 20% in large cap stocks (short to medium term)
- 20% in small cap stocks (short to medium term) - Tends to make big moves in reasonable time
- 20% in mid cap stocks (short to medium term) - Tends to make moderate moves in reasonable time
How to select stocks from each group?
In next section we will look at identifying potential stocks to BUY.
Obey the rules and practice discipline:
We need to be disciplined while trading stocks as stocks are very risky and one can loose our capital lot faster. Following are certain guidelines one should never forget while trading stocks to avoid significant losses.
- We ONLY trade stocks with a specific pattern (shown below) since we do not have thorough understanding of stock selection.
- We always add a stop loss at 10% (or as per your risk appetite) as soon as we buy a stock to avoid further losses.
- We should have some sense of target price for our selected stock (after we buy it) and once it reaches the target price we sell half (50%) of the position to lock in the partial profits.
- For remaining half position, we add a trailing stop of 10% (or as per your risk appetite). If the stock reaches new high price than we can capture added profits but in case it drops we do not loose entire profit yet protect our capital.
- Capital preservation is always our top priority.
How to select stocks and apply our Technique using base strategy:
- Typically we should trade stocks during BULL market (market upward trend) which you can identify from our section Reading Sensex. But in case if we are in Bear market (market downward trend) then trading stocks is even more difficult and hence wise to stay away. If you still want to trade stocks then make sure you follow rules strictly and avoid major losses
- This specifically applies for short to medium term holding period. For long term stock investments, you can choose to hold them for years in which case market direction may not be necessarily applicable
- If we get market "entry signal" then we identify best performing stock (top ranked stocks with ranking value equal or above 105)
- Narrow stock list by selecting stocks with a specific pattern shown below, only trade these stocks once the pattern is broken as shown
- Typically stock should be above its 50 day and 200 day simple moving averages (applicable for stocks where holding period is small to medium term) but if a good pattern exist then you can buy stocks which are below its 50 day and/or 200 day simple moving averages, however remember that 50 day and 200 day simple moving averages can act as resistance if stock is below these moving averages
- Earnings result announcement for the selected stock should not be within a month
- If the company is in some special news such as merger/ take over/ bankruptcy/ new product launch/ etc, then please evaluate the news as per your judgement before buying the stock. Company/Sector news can significantly affect stock price
- Once we buy stocks, do not forget to immediately add a stop loss (applicable for stocks where holding period is small to medium term)
- If we get market "sell signal" then we sell full position in a particular stock to secure our profits or cut our losses (applicable for stocks where holding period is small to medium term) or we re-evaluate our stop point
Stock Breakout Pattern
What do we do if market is in correction or Bear market cycle!!!
When market is going down (market correction or bear market) then how should we choose stocks. We do not recommend buying stocks when market is moving down as momentum strategy does not work. It is best to have patience and stay in cash or invest in bear ETFs. Remember, market correction can last for several weeks/months. However, in bad market some stocks will make big moves but to identify such a group is not an easy task. Our primary goal is to protect our capital.
When market is going down (market correction or bear market) then how should we choose stocks. We do not recommend buying stocks when market is moving down as momentum strategy does not work. It is best to have patience and stay in cash or invest in bear ETFs. Remember, market correction can last for several weeks/months. However, in bad market some stocks will make big moves but to identify such a group is not an easy task. Our primary goal is to protect our capital.
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