There are a lot reasons why you might decide to invest in a company. You’re a big fan of the company’s products. You admire the CEO. You’ve read a positive news story. Your friend swears by the stock.
Unfortunately, none of these things have any bearing on whether this particular stock is a good buy. The question you should be asking is: “Is this stock currently under-priced?”
Intuition is not your friend in online trading
As a self-directed investor, it’s important to accept that there is no short cut to answering this question. Intuition probably serves you well in many areas of your life. But stock picking for your online trading isn’t one of them.
As a professional, you’ve probably backed your hunches with great success. But when you trust your instincts at work, you’re relying on ‘expert intuition’ – the instant recognition that something is ‘right’ or ‘wrong’ based on years of experience.
There’s no such thing as ‘expert intuition’ for company shares for two reasons. First because there’s too much uncertainty. As we’ve seen time and again in world markets, ‘unexpected’ is the new normal. Even if you’ve been trading shares for decades, the market can still act in ways you’ve never seen before.
Second, there are too many factors involved in deciding whether a stock is a good buy. You need to look at the top down factors: What’s the economy doing as a whole? What does that mean for this company’s industry? And you also need to look bottom up: Is the company financially sound? Is it competitive within its industry?
Fortune favours the researcher
This means there’s no substitute for research. You need to understand how a company makes money, its strengths and weaknesses, where it’s going next and the environment it’s operating in.
The good news is most of this information is readily available on your online trading platform. You just need to know what to look for and where to find it.
Where to start looking
Check your online trading platform for broker consensus recommendations. These are collated from broking and research houses. Basically, they tell you that four to five expert sources think a particular stock is a good buy.
That doesn’t mean you should buy it. These recommendations don’t come with an explanation but they can point you in useful directions to start digging through the company information provided by Morningstar on the online trading platform.