As of July 2024, there are about 1800 listed companies from 45 distinct sectors trading on the London Stock Exchange (LSE). Picking stocks is the first step to start your stock trading journey.

How to find good investment stocks?

Using fundamentals to pick stocks

Fundamental analysis refers to studying a company’s financial health and performance to assess its intrinsic value.

Study financial statements:

From a company’s financial statement, you can see data like income statements, balance sheets, and cash flow statements and each part tells you its story.

• Income statement analysis: Key metrics like gross profit margin, operating margin, and net profit margin indicate the company’s profitability and operational efficiency.
• Balance sheet analysis: Assess liquidity ratios (such as current ratio and quick ratio) to determine the company’s ability to meet short-term obligations; Examine leverage ratios (like debt-to-equity ratio) to evaluate the company’s debt levels and solvency; Analyze asset turnover and return on assets to assess how efficiently the company is utilizing its assets.
• Cash flow statement analysis: Focus on the company’s operating cash flow, free cash flow, and cash flow from investing and financing activities to understand its cash flow adequacy for operations, capital expenditures, and debt repayments.

Assess valuation metrics:

Evaluate valuation metrics such as price-to-earnings ratio (P/E), price-to-book ratio (P/B), and dividend yield to determine if a stock is undervalued, overvalued, or fairly priced.

Evaluate growth prospects:

Assess the company’s growth potential by analyzing historical growth rates, earnings forecasts, and industry trends.

Using technicals to pick stocks

Technical analysis is examining historical price movements and trading volumes to identify patterns and trends that may help forecast future price movements.

Select relevant indicators:

Choose technical indicators that align with your trading style and goals, such as:

• Moving averages
• Relative Strength Index (RSI)
• MACD (Moving Average Convergence Divergence)
• Bollinger Bands

Identify trends:

Determine the direction of the stock’s trend (uptrend, downtrend, or sideways) by analyzing moving averages, trendlines, and chart patterns like head and shoulders, double tops/bottoms, and triangles.

Utilize support and resistance levels:

Identify key support (price level where buying interest is strong) and resistance (price level where selling pressure is significant) levels to gauge potential entry and exit points.

Employ chart patterns:

Recognize common chart patterns such as flags, pennants, wedges, and rectangles to anticipate potential price movements.

Final words

No matter which technique you use to select good stocks to invest in, you need to define your investment objectives, risk tolerance, and time horizon. And always remember, there is no foolproof formula that will guarantee 100% success. It will be helpful if you test your strategy in a demo account.