The main objective for investing in anything is to make money. With stocks, you make money two ways by selling your shares at a higher price than you paid and from dividend payments. Additionally, your decision to invest in a stock could be supported by a number of other reasons. Such reasons will guide you in the selection process.
Here are some reasons to buy a stock:
My investment objectives vary as I want to invest for the long-term (a fun and comfy retirement life) and the short-term (concerts, trips, and buying a couple of properties in Canada and somewhere hot).
For my retirement portfolio, it’s all about the long game and I’m looking to invest in something that will do me well for years, even decades. So, I look for stocks that have ‘blue chip’ qualities: they pay dividends, they’re well-known, well-established and have been around for a long time, and they usually offer more than one type of product or service which allows them to adapt to various consumer demands and trends. It’s also a bonus when the stocks are in defensive sectors such as utilities and consumer staples. I don’t do much analysis here, I apply a very basic, rudimentary logic.
There is no guarantee these stocks won’t suffer when the economy is slow, but the idea is that even during tough times, they’ll do better or suffer less, and they’ll still likely pay you dividends. If their stock prices take a hit, I’ll likely buy more shares when they start to recover because they’ll be cheaper.
For my swing trades, I look for stocks that look like they’ll do well over the next few months to a year. I look for typically strong stocks that have been quiet for a while and haven’t seen much trading action. When this happens, it’s usually because their sectors have also been quiet. If all the stocks in a particular sector have been down for a while, I’ll narrow down my selection based on the stock price and volume. (See Stock Picking – Part 1.)
The selection process for my swing trades is more involved as I use a very basic form of technical analysis of a stock’s price history to help me decide on where I’m going to buy and where I’m likely going to sell. Technical analysis is about analyzing the price history of a stock in relation to its trading volume, sector, and market environment.
Many people dispute the validity of technical analysis and prefer to examine the fundamentals of a company’s value in relation to its share price instead. They’re all valid to some degree and many financial pros analyze both the technical and fundamental information.
I prefer to analyze charts because I’d rather see if I’m paying much more than others who got in earlier than me. The lower the price I pay for a stock, the more confident I am in the trade. It’s not a guarantee that the price won’t go lower, but even if it does, I will suffer less by getting in at a lower price than if I bought a stock after it became hot and expensive. I never buy a stock after it makes the news because it’s usually too expensive by then.
Above is a very basic chart of a stock that I actually own. I consider a stock to be ‘quiet’ if it’s trading sideways (the first horizontal line). Think of a stock’s price in terms of flying in an airplane; trading sideways is like starting on the runway. I try to buy either when it’s still on the runway or just as it’s taking off (no higher than where the airplane is). So I just have a quick glance at a stock’s chart to determine if it’s just taken off or if it’s gone far beyond the clouds. If it has long taken off already, I’ll just wait for another sideways setup. Sometimes this wait time could take months to years and I’ll just keep checking the charts every now and then.
For years, I’ve been using freestockcharts.com to look up charts for Canadian and U.S. stocks. It’s FREE and the features and tools for the charts are very similar to what you would use if you had a pro trading account with a brokerage. To look up a stock, you just type the company name and you can select it from the list of options it provides. Sometimes a company will trade on both the Canadian and US stock exchanges, so be sure you’re selecting the proper exchange for you. There are many short and informative tutorials available on its site and on YouTube.
You can decide to buy a stock using very basic logic. It can be as simple as, “My bank is great. I’m going to buy its stock.” And there you go, you own a dividend-paying stock. Those who want to build a more diversified stock portfolio seek more information and try to pick stocks using some strategy.
My process for picking stocks is quite simple and involves less information than what is required by trained financial professionals. I don’t manage other people’s money, only my own, so I’m less stressed out about aligning a certain number of factors before buying or selling a stock.
I usually work with my man, JP, when it comes to selecting stocks, but sometimes we make decisions independently of each other. For this reason, JP and I each have our own investment accounts. My strategy is quite loose in form, but I feel that being rigid will lead to over-analyzing and worry. I’d rather be relaxed and let my trades work when they do because if I panic or get too excited, I’ll sell them too soon.
With stocks, I operate on different time frames. I sometimes day trade, and I always close the position within a day or less. My main thing has become swing trading, which means I’ll hold a position anywhere from over a day to a few weeks or even a few months. And then I’ll do real investing where I’m looking to hold a solid dividend-paying stock until I retire.
I don’t recommend that anyone day trades, it’s a far too risky way to handle your hard-earned money and it’s not investing at all. Many might argue that swing trading isn’t investing either, but it depends on how you look at it. I see it as shorter term investing. Your level of involvement can vary from being very active by watching stocks and the markets, and managing your trades all the time, or you can be more hands-off and just be willing to do such things occasionally. I’m very hands-off with my swing trades. Most of what I’m going to be talking about is related to how I pick stocks for swing trading.
I need to declare that when it comes to managing my money, I have a higher risk threshold than the average person. Over the years, I’ve enjoyed big wins and suffered abysmal losses. My confidence comes from years of experience, training, research, lessons, trade analysis, and self-examination. I’m finally in a place where I’m quite happy with my stocks and current strategy. I’m also happy accepting that if the markets change, I might have to adapt my strategy.
What I’m revealing here today is just to share my method among the curious, not to teach it or to say this is what you should do to make money. My only hope is that you’ll pick up some good ideas and know how to apply whatever is useful to your own decisions.
Just remember that there is no fail-proof way to invest, nor is there one way to make money from investing. Investing is just one aspect of personal finance, which is how you manage your money and make financial decisions. I feel that the other aspects related to personal finance — working, budgeting, managing debt, and saving — are just as important.
I’m going to break down my explanation into parts. Each part will be blogged separately over the next few weeks.
I look for stocks that trade a lot in the TSX. I narrow the search process down by looking at the larger stocks in the TSX that are listed in the S&P/TSX 60 Index or the S&P/TSX Composite Index. If you click on those links, you can see the index’s stocks under ‘Constituents.’ If you don’t know what an index is, it means you haven’t read my book yet! You can still refer to the Terminology page for quick reference.
I like stocks that have the higher daily trading volume which means the number of shares bought and sold in a day. So with TSX stocks, I’d like them to trade at least 10K shares a day; the more the stock trades, the more interested I am in it. My TFSA is less funded than my other trading account, so I tend to look for Canadian stocks that are under $20, preferably under $10 so that I can buy more shares.
Rarely do I buy stocks that trade on the TSX Venture Exchange, but if it’s for stocks in a relatively new industry (like cannabis), then I’ll buy the from the venture if it meets all my requirements.
I use the amazing Screener feature on finviz.com to find US stocks. For free, you can customize different search requirements and save those settings. I’ve created different “presets” for finding current financial stocks, tech stocks, oil stocks, pharma, transports, etc., that suit my preferences.
The one common feature I use in all my searches is “Average Volume,” so I usually prefer US stocks that trade over 500K shares a day. Some people look for stocks that trade much more, some are okay with less than 500K. If I have too big a list, I’ll also add “Current Volume” to the search criteria and I’ll select over 1M shares because it means it’s currently trading a lot more than its average volume and something unusual could be going on with those stocks.
I usually look for US stocks that are over $5 in share price, mainly because the higher-priced stocks often, but not always, move more in price so I can make a decent profit in a shorter amount of time. I have more money available in my US trading account too, so I’m able to shoot for higher-priced stocks.