HOW do you pick stocks to buy? Well, it depends on your overall strategy: short or long-term holding, value or growth, your aversion to risk, among other things. For now, let’s talk about the length of time you plan to hang on to your holdings — short or long term.
- Short-term traders hold stocks for one year or less. Long term traders hold for more than one year.
- Short-term trading demands a lot of attention. You need to continuously check the stock for buying and selling decisions.
- Your short-term gains are taxed at regular rates that are higher than long-term gains that are taxed at lower capital gains rates.
- Short-term traders rely on technical analysis that focuses on stock chart patterns to forecast future pricing trends.
- Technical analysis assumes that future patterns and price action will be similar to previous patterns and movement.
- Day traders look for short-term profit from a large number of trades with small profits.
- But be careful: Statistics show that 80% of day traders lose their capital within one year. Ouch.
- Long-term investors rely on fundamental analysis that examines a company’s management, competitors, industry position, growth rate, growth potential, revenues, and earnings. They use metrics such as earnings per share, price-to-earnings ratio, price-to-earnings growth, and dividend yield (Personally, I start with fundamental analysis to choose stock and technical analysis to time entry and exit).
- Look for value stocks of companies considered undervalued, those with low P/E (Price-to-Earnings) ratios.
- Growth stocks focus in faster-growing but more expensive and volatile companies. Think Tesla.
- Improve your trading success by using:
– Fundamentals to select the candidate, and
– Technicals to dictate the ideal entry (buy) or exit (sale) price.
- Be disciplined. Don’t let emotions get the better of you. You make more money by focusing on taking profits and harvesting gains. Good luck.
Read next weeks’ tips for fundamental and technical analyses.
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Victor Santos Sy, MBA. CPA (Retired)
Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to email@example.com.