How to Find Stocks That Outperform the Market

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Everyone is intrigued by the idea of beating the market. 

Whether you’re a casual investor or a seasoned Wall Street pro, the idea of finding stocks that will outperform the market year after year is a difficult task. 

The stock market is a complex beast, and stocks are constantly changing hands. The truth is there is no surefire way to consistently pick stocks that will outperform the market, no matter how savvy you are.

Stock Market Analysis is often referred to as the science of stock market investing. 

It involves the application of statistical analysis on past market data in hopes of predicting future performance.

Investors and traders use this analysis to assess the likely returns from investment in a given stock, portfolio of stocks, or market as a whole.

In order to be able to predict how stocks will perform in the future, you need to first understand what a stock is.

Stock in a company is just like a share of ownership in that company. When you buy a share of stock in a company you are buying a piece of the company. 

The company will use this capital to expand the business and hopefully earn more money in the future.

They are listed in a stock exchange where they can be bought and sold.

Types of Stocks

The two most popular types of stock are common stock and preferred stock.

Common Stock

Common stock and preferred stock are both types of stock investors can buy from companies, but there are several differences between the two. 

The main difference between common stock and preferred stock is the number of times a year that investors are paid dividends. 

Like preferred stock, common stock is ownership of a company. However, unlike preferred stock, it carries voting rights. 

This is why common stockholders have a say in how a company is run. However, common stock doesn’t usually pay a dividend, which is a regular payment made to shareholders.

Preferred Stock

Preferred stocks share some similarities to common stocks, but they possess some distinctive features. 

This type offers a dividend that can fluctuate depending on earnings, but it is not guaranteed.

Preferred stock also offers the investor a greater degree of control over the company, although the dividend may fluctuate depending on the company’s earnings.

The main difference between preferred stock and common stock is liquidation preference. 

Liquidation preference is the amount that preferred stockholders are entitled to get before any payments are made to the common stockholders. 

This can be a substantial amount and should be considered when investing in companies that issue preferred stock.

How To Find Stocks Worth Investing In?

The simplest option is to use a financial advice company. 

The most famous of these types of services is the Motley Fool, which is well-known for giving accurate and timely advice.

Investment funds using active management strategies rely on the efficiency of the stock market to value stocks at fair value. 

Index funds that pursue a passive management strategy rely on analysts’ research expertise to distinguish between a stock’s value and its market price. 

Most investors don’t have the time to buy an army of investment analysts who rifle through balance sheets to make money from stock. 

Individual investors believe that analysts can outperform the average return on equity markets by finding values that others have missed and that equity markets are efficient and leave no money on the table. 

Buying shares in companies with early growth is the holy grail of investment, and it is even harder to find them when the stock market is booming. 

In a bull market, you can identify successful companies with strong growth prospects and calculate whether you want to pay for them or not. 

This is not easy, but it is lucrative and pays off over the long term, especially in periods of high share prices and increased growth.

Patience is Key

It would be best if you waited until the inevitable market decline puts the share price within reach and then wait until it returns to its original price. 

Ideally, a stock’s return is high enough to do well enough to provide investors with partial protection in a bear market. If computer traders knock down a reliable growth stock offer, buy the stock to enjoy outsized profits on the bounceback. 

Listed companies are required to provide investors with detailed annual financial statements that provide detailed information about their financial performance for the quarter just ended. 

Stocks to Avoid

It is not so easy to say which stocks you should avoid as there are so many variables. However, as a rule of thumb, you should highly consider avoiding the following:

Low liquid Companies

Companies with low liquidity are often the first to suffer when there is any friction in the market they belong to.

This is because they don’t have a buffer to support their operations if business turns sour. They may seem like great buys initially, but seeing as how unpredictable the world is, it is best to avoid these stocks if possible.

High Debt Companies

It’s simple if a company is spending vastly more than it is taking in revenues, you probably want to avoid it. 

Now there are some exceptions, Netflix being the most obvious

However, you should research the company you are interested in and see what their roadmap to servicing the debt is to become profitable eventually.

Sometimes high debt is inevitable for the type of business, but if your research shows a lack of ambition and foresight, then stay away.

Falling Knife Category Companies

These stocks are from companies whose stock is falling like a sharp knife, i.e., it looks like you might get a good deal, but you should never attempt to catch a falling knife!

Low Visibility Companies

Suppose a company has decided to issue stocks but keep a low profile, set alarm bells ringing. Raising cash to fund growth is fine, but when it becomes too opaque to see what growth they are going for, you should invest elsewhere.

Last Week’s Best Buys

If you missed last week’s top picks, this list might not be what you are looking for. 

The list this week was composed of penny stocks with low historical volatility and high liquidity. 

Thus, it is doubtful that any of these stocks will go up this week, but you never know what will happen. 

Tools to Help Choose Stocks

You can use several different tools to help you pick stocks. 

Those tools may include:

  • Financial news: Such as the Motley Fool mentioned earlier.
  • Stock quotes: Such as from the leading stock exchanges.
  • Stock watch lists
  • Stocks to buy
  • Stocks to sell
  • Tracking stock trends
  • Stock screeners: These scan the entire market using variables that you enter.
  • Charting software: Great for seeing historical and forecasting data.
  • Stock simulators: These are for people starting and wanting to practice before committing real money.
  • Trading newsletters: Often paid via monthly subscription, they give expert advice on what stocks are recommended.
  • Summary

    There are many ways to approach investing in the stock market. 

    Some people only want to invest in companies they know and trust, while others are only interested in stocks that are likely to rise dramatically in a short time. 

    Most investors, however, tend to fall somewhere between these two extremes, as they prefer the peace of mind of investing in a reliable company as well as the potential for success. 

    Finding stocks that can outperform the market can be challenging, but hopefully this post can provide some tips on how to go about finding them and what to look for in a company.