How do i pick a quality stock from the stockmarket? want to build a portfolio

There were some quality posts on this forum on investing so I thought I would ask this question here. Is there a process or procedure I can use, sort of like a checklist when choosing stocks so I know that I've picked quality ones as opposed to mediocre ones. I've got some spare cash that I want to invest over the long run 15 to 20 years and I just want to leave it there and reevaluate every 12 months. Thanks

Did you know that out of 100% of traders nearly 90% of them fail and only 10% actually make a profit and continue, from this statistic we can deduce quite easily that the main reason why people get things wrong when choosing a trade is because they don’t put in the groundwork to start with, many people ask how to choose a quality stock and the response is you have to undergo through research before you actually choose the stock.

You need to take a top down approach, you need to start with the world economy as a whole and then filter down to the individual company and how well it is doing using the tools that we have available today.

World economy outlook

At the beginning do some research into how the markets are doing around the world, nowadays with globalisation so prevalent one economy always effects another company and you really need to do your homework to see if the markets are buoyant or ready to fall, if you think that the long term prospects are positive then you can go with confidence to the next level.

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Domestic outlook

Once you have competed the world economy outlook you need to focus on how the domestic economy is doing, look at a variety of indicators such as unemployment and interest rates as well as inflation, when unemployment is low and interest rates are low and inflation is in check then this provides the perfect recipe for growth and as a results companies will also expand, if you think that the economic indicators are positive then you can go to the next level.

Markets in general

Look at the markets now especially the index such as the Dow Jones or FTSE 100, if you can see that the index looks healthy and is growing at a steady pace and there is no likelihood of a retraction in price then you can be confident that the markets are buoyant and people have confidence and are happy to trade in the market place.

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Look at the sectors

Once you have ascertained the health of the general market you need to pick out sectors which are performing really well and those that are performing weak, at any one particular time some sectors perform well while other sectors perform badly, if you can zero in on where you are in the economy whether expansion or retraction then you can find the sectors which will do well and not so well.

Once you have found the best performing sector and worst performing sector you need to apply your fundamental and technical analysis to this to find the best and worst performing companies.

Fundamental analysis

This is the study of the company’s financial history, it is like being an accountant and going through the company’s books and really looking deep into the companies financials, find companies which do not have a lot of borrowing or leverage and have a strong cash flow and consistent profits this will ensure that you have chosen the best company out of the best sectors. When looking at the worst sector find the ones that have the poorest history and are really weak companies that have been performing adversely and where profits are falling.

Technical analysis

Once you have applied the fundamental analysis and pick 2 strong companies and 2 weak companies it is a matter of timing to go into your trades, technical analysis allows us to time our trades, it is the study of how to look at a chart and using support and resistance lines as well as chart patterns determine whether the stock will go down or up.

Placing your trades when markets rise

If you think the markets are going to rise then you need to place trades on your two strongest stocks that you have chosen and as a hedge you need to place a short on the weakest stock that you picked, if the market rises then the two strong stocks will rise substantially while the weak stock will probably remain at the same level, however if the markets were to fall for some adverse reason then because you choose two really strong companies the chances are they will not fall as much and because you picked a weak company it will fall substantially and you will make money because you shorted the weak stock, this way you are hedged against the risks of falling markets.

Placing your trades when markets fall

If you think the markets are going to fall then you place 2 short positions on your weakest stocks and a long position on your strong stock, if the markets fall then you make a good profit from the weak companies and the strong company will probably not fall much, however if the markets rise from some unexpected good news then your strong stock will rise substantially and your two weak stocks will probably remain the same because they are weak, again you will be hedging yourself while making a decent profit.

New traders often neglect this basic methodology and often get burnt, if you are a new trader and are looking to exploit the market then the key to success is educating yourself in the wisdom the successful traders have, once you have the knowledge you need to build experience from virtual trading, once you have the experience start with a small amount and be cautious and conservative, never become emotionally involved and have entry and exit strategies before you enter the trade.

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