Separating important information from noise and static is the hardest part of any stock picker’s job. There’s so much that can be surmised from stock price moves, earnings misses or news stories. The trickiest part is figuring out what matters and what doesn’t. Is a price-to-earnings ratio the best way to judge a stock? Or maybe you’re a fan of moving averages and chart patterns. Perhaps you don’t even pay any attention to technical or fundamental analysis and simply buy companies with good products, strong leaders and no debt.
Investment experts differ on advice, too. Random Walk Down Wall Street author Burt Malkiel thinks that analyzing chart patterns or moving averages is a waste of time. On the other hand, John Murphy has written books and appeared on talk shows to discuss the importance of charting technical factors to discover trends.
Technical analysis and fundamental research can actually be used together to determine which stocks have the best potential for big gains.
Stock Buying Basics
Before you look at any stock indicators, you’ll need to be in a position to buy shares. This means you’ll need to open up a brokerage account and come up with the capital to fund it. If you’re just learning how to read charts and financial statements, you might experience early losses as you trade.
If you’ve got enough cash for stocks, find an online brokerage with good chart and research options. Many online brokerages like E-Trade and TD Ameritrade have charting tools and access to analyst research, financial statements, and conference calls.
You can view Benzinga’s list of the Best Online Brokerages to weigh the pros and cons of each. Here's a quick list of our favorites.
- Best For:Active and Global TradersSecurely through Interactive Brokers’ website
- Best For:Traders of All Levelssecurely through Moomoo's website
- Best For:Mobile Userssecurely through Plus500's website
- Best For:Momentum traderssecurely through Centerpoint Securities's website
- Best For:Intermediate Traders and Investorssecurely through Webull's app
After you’ve opened and funded an account, make sure you determine your risk tolerance for investing. An appetite for volatility is usually only developed with experience. If you can’t stand losing money, you’ll want to avoid the riskiest securities.
What do I Look for When Buying Stocks?
What you buy depends greatly on your predetermined time horizon. Are you saving for retirement or just trying to make as much money as possible in a short amount of time? Short- and long-term investors will when poring over different things with investment choices.
In the short term, investors use technical analysis in an attempt to predict the next movement of volatile securities. In the long term, investors are more concerned with underlying business growth.
If you're a short term investor..
When you’re investing for the short term, you’re looking for stocks that show potential for a big move. Investors with short time horizons have to be able to handle volatility, but at the same time can’t hold a losing position too long. It’s a tight line to toe. Here are a few characteristics to look for when seeking short term gains:
- Stock chart patterns: Technical analysis is all about charts, so you’ll want to familiarize yourself with different types of price activity. Investors use patterns like pennants, flags, triangles, head, and shoulders to predict future stock price movements based on two key concepts: support and resistance. Support and resistance are trend lines that signify potential trading entry points.
- Simple moving averages: This metric examines a combination of closing prices over a certain period of time, usually between 50 and 200 days. The 50- and 200-day averages are used in conjunction to determine the direction of the stock’s trend.
- Catalysts: Catalysts are upcoming events that could trigger a rapid increase or decrease in a stock’s price. For example, biotech companies often sway wildly following the announcement of positive or negative results in clinical drug trials.
If you're a long-term investor..
Those saving for retirement, their children's college education, or other long-term goals can handle market volatility and less liquidity. Here's what else you should look for:
- Earnings growth: Some people still like to use a price-to-earnings (PE) ratio when looking at stocks, but long-term investors need to pinpoint growth. A growing company is a successful company and it will be reflected in the long-term stock price.
- Wide moats: Companies with wide moats provide long-term investors with stability. A wide moat means it’s difficult for new entrants to build up and challenge the superior firm in a certain niche. Airline stocks have notoriously wide moats because air travel is highly specialized and regulated by the federal government.
- Limited debt: Too much debt can be a killer for the long-term prospects of even the most promising companies. Business cycles can be vicious and the overly-leveraged firms are the first ones to go bankrupt when a serious downturn occurs.
Your risk tolerance will be the primary factor in deciding the desirability of individual stocks. Not every investor will like the same set of securities. Before picking any stocks, you’ll need to figure out what your goals are and determine what type of investor you want to be. A stock chart alone won’t give you a complete answer.
About Dan Schmidt
Dan Schmidt is a finance writer passionate about helping readers understand how assets and markets work. He has over six years of writing experience, focused on stocks. His work has been published by Vanguard, Capital One, PenFed Credit Union, MarketBeat, and Fora Financial. Dan lives in Bucks County, PA with his wife and enjoys summers at Citizens Bank Park cheering on the Phillies.