How do beginners choose stocks? Master fundamental and technical analysis to accurately select potential stocks.

New investors in the stock market often face a difficult question: How to pick stocks to avoid pitfalls? Selecting truly worthwhile investment targets from thousands of stocks requires a systematic approach and calm judgment. This article will approach from a practical perspective to help you understand the core logic of how to choose stocks, whether you pursue short-term profits or long-term growth.

Step 1: First, ask yourself, what are your investment goals?

How to select stocks depends on your investment time frame. If you plan to trade within minutes to months, it’s considered short-term; one to five years is long-term. This choice will directly influence your stock selection criteria.

Ask yourself these key questions:

• Are you saving for retirement or seeking quick gains?
• How much time do you spend daily monitoring stock quotes?
• When facing stock price fluctuations, how much psychological pressure can you withstand?

Short-term trading carries higher risks because your understanding of the companies you buy may be limited, requiring stronger mental resilience and trading skills. The good news is, short-term and long-term are not mutually exclusive; many investors combine both to diversify risk.

Long-term stock selection: Use fundamental analysis to find “moat” companies

1. Find industry monopolists or strong players

When thinking about how to choose stocks, view stocks as ownership of a business, not just fluctuating numbers. In the long run, a company’s profitability is the key factor determining its stock price.

Ideally, you look for companies with near-monopoly positions in their markets—that is, those with hard-to-attack competitive advantages. For example:

• Google (GOOG.US) dominating search
• Microsoft (MSFT.US), Apple (AAPL.US) excelling within their ecosystems
• Meta (META.US) leading in social media

These companies are worth holding long-term because they possess a “moat”—advantages that are difficult for competitors to copy or surpass.

2. Stay away from companies that have lost market position

Negative examples are equally important. When how to choose stocks, avoid:

• Once-glorious but now declining companies: like Nokia (NOK.US) and BlackBerry (BB.US) failing in the smartphone market
• Industry leaders eliminated by new technologies: like Kodak (KODK.US) in photography
• Companies with continuously shrinking market share

In highly competitive industries, stock picking is possible but more challenging. At such times, excellent management becomes crucial. JPMorgan Chase (JPM.US) exemplifies good management providing a competitive edge in banking.

3. Leverage your professional expertise

People working in certain industries often outperform Wall Street analysts in stock picking. If you work in tech, healthcare, or manufacturing, using your industry insights can lead to excess returns. This is an underestimated advantage retail investors have over institutional investors.

4. Follow long-term industry trends

Besides analyzing individual companies, identifying long-term industry-wide trends is equally critical. For example:

• The shift to clean energy and electrification boosts demand for copper and other raw materials
• Most copper mining companies benefit from this structural trend

Capturing such structural opportunities means even selecting second-tier companies within the industry can yield good returns.

Valuation matters: Use P/E ratio to judge buy/sell timing

How to choose stocks is not just about finding good companies but also buying at reasonable prices. The same stock at $100 can be a good investment; at $200, it might be a trap.

The simplest and most widely used valuation tool is the P/E ratio:

P/E Ratio = Stock Price ÷ Earnings per Share

Method 1: Compare with historical valuation

Compare the current P/E ratio with the stock’s past fluctuations over several years. For example, Wells Fargo (WFC.US) had a P/E range of 8 to 16 over the past decade. If now it’s at 9 and the company’s fundamentals haven’t worsened, it’s an attractive entry point.

Method 2: Cross-industry comparison

Compare similar companies within the same industry. For instance, ExxonMobil (XOM.US) and TotalEnergies SE (TTE.US) are both energy giants. If their growth prospects are similar, the one with the lower P/E is relatively cheaper.

Precautions when using P/E ratios:

• High P/E doesn’t necessarily mean expensive. If a company has excellent growth prospects, a high P/E may be justified. Conversely, deteriorating growth prospects can cause P/E to plummet suddenly (e.g., Netflix NFLX.US in early 2022).
• Low P/E may hide risks. Low valuation could stem from real difficulties—like cyclical industry downturns or high debt risks.
• Macroeconomic factors influence valuation. Rising interest rates and central bank policies can push P/E levels higher or lower.

The ideal buy point is when the P/E is temporarily depressed due to short-term factors, but the company’s long-term profitability remains intact. Remember to diversify and control position sizes.

Short-term stock selection: Use technical analysis to catch trends

The logic for short-term stock picking is entirely different. You’re not waiting for fundamentals to materialize but preemptively capturing ongoing or emerging trends.

1. Trend indicators confirm direction

Moving Averages (SMA) are the most basic trend tools. Usually based on the last 50 or 200 trading days. An upward-sloping moving average generally indicates an uptrend, especially when the stock price is above the line.

Exponential Moving Averages (EMA) are an upgraded version of SMA, giving more weight to recent data, making them more responsive to price changes.

2. Momentum indicators detect strength changes

MACD (Moving Average Convergence Divergence) is a popular momentum indicator. The main signals are crossovers between MACD line and signal line:

• When MACD crosses above the signal line, it’s a buy signal (bullish)
• When MACD crosses below, it’s a sell signal (bearish)
• Crossings of MACD over zero line (negative to positive or vice versa) strengthen the signal

3. Use chart patterns to forecast price movements

Technical analysis also involves recognizing chart formations:

• Head and Shoulders Top/Bottom
  Price forms a peak (head) between two lower peaks (shoulders). Breaking the “neckline” (connecting the lows of shoulders) signals reversal. Head and shoulders bottom is its inverse, indicating an upward reversal.
• Double Top/Double Bottom
  Price reaches similar highs or lows twice. Breaking the line connecting these points signals reversal.
• Ascending Triangle
  Support levels gradually rise (each low higher than previous), resistance remains horizontal. Breakout above resistance suggests continued upward movement.
• Descending Triangle
  Resistance levels gradually decline (each high lower than previous), support remains horizontal. Breakdown below support indicates further decline.

Three stocks to watch in 2024

NVIDIA (NVDA)—Core beneficiary of the AI wave

NVIDIA’s chips are regarded as the gold standard for AI industry. In 2023, NVIDIA’s stock tripled, and this year has gained nearly 40%, making it a key driver of the US stock market. Among the “Magnificent Seven” growth tech stocks, it performed outstandingly, surpassing a trillion-dollar market cap mid-last year, and this month overtook Amazon and Alphabet to become the third-largest US company by market value.

Tesla (TSLA)—Challenges and opportunities coexist

After a stellar 2023, Tesla faces tests this year. Its stock has fallen nearly 23% since the start of the year, mainly due to concerns over slowing global EV sales. Its position among the “Seven Strong Tech Stocks” is threatened, with market cap below Berkshire Hathaway, Lilly, and Microsoft.

However, short-term challenges (such as the temporary shutdown after the Berlin factory fire and Elon Musk’s compensation disputes) have not changed analysts’ long-term optimism. The fundamental logic of the EV market remains intact.

Microsoft (MSFT)—The biggest winner in the AI era

Microsoft leads in generative AI due to precise bets. The latest FY2024 Q2 earnings report (Q4 2023) exceeded expectations in revenue, EPS, and cloud growth, marking its first report after acquiring Activision Blizzard.

In 2023, Microsoft’s stock rose 57%, far outperforming the S&P 500’s 24% increase. In early 2024, it has gained about 9%, again leading the market by 3%. Wall Street is confident, with 50 analysts recommending buy, only 4 neutral, none bearish, and an average target price of about $443, implying an 8% upside.

Final advice on stock selection

From a long-term perspective, stock prices ultimately follow company profits. Whether you are a beginner or veteran, the most reliable approach is to develop a stock-picking strategy based on analyzing company fundamentals and industry position. Then, assessing valuation is equally essential, as the purchase price directly affects investment returns.

For short-term trading, rely on technical indicators and chart patterns. The key insight is: When fundamental and technical analyses agree, you often achieve the best investment returns.

Regardless of the time frame, successful stock picking requires discipline, patience, and continuous learning.