Stock Selection Strategies: Overview

Thousands of publicly traded companies are listed on the major Canadian and U.S. exchanges, and a few thousand more American depositary receipts (ADRs) represent international companies. That’s a lot to choose from.

Everyone knows that the secret to success in the stock market is “Buy low, sell high.” But how exactly do you decide which of those thousands of stocks will rise in the future?

At a basic level, you may want to consider two factors: performance and portfolio fit. Past performance does not guarantee the future, but it is still worthwhile to evaluate stocks based on their historical ability to deliver consistent returns. In addition, you might consider how a stock fits into your portfolio: does it suit your investment objectives, risk tolerance, liquidity needs, tax considerations, time horizon or other circumstances?

Beyond those basic considerations, you may choose to apply a selection strategy based on your investment philosophy. That is, your assessment of how investors and stock markets behave will make certain factors about a stock more relevant to your decision-making. You can then research and examine those factors to identify stocks that are worthy of a place in your portfolio.

The common stock selection strategies explained here are:

• Fundamental analysis
• Technical analysis
• Stock market sectors and sector rotation
• Growth vs value
• Growth at a reasonable price (GARP)

As a self-directed investor, you must decide which stock selection strategy most closely aligns with your own personal investment philosophy.