How to Find Good Stocks: A Beginner’s Guide to Smart Investing

Finding good stocks can feel overwhelming, especially if you’re just starting out. With thousands of companies trading on various exchanges how do you separate the winners from the losers? Don’t worry – I’ve been there too and after years of investing (and yes, making my share of mistakes), I’ve learned some valuable techniques to identify promising stocks.

Today I’m gonna share my approach to finding good stocks using both fundamental and technical analysis – two powerful methods that complement each other perfectly when used together.

Fundamental vs. Technical Analysis: Why Not Both?

Many investors feel they have to choose between fundamental or technical analysis, but that’s simply not true. Each approach has its strengths, and combining them can give you a more complete picture.

What is Fundamental Analysis?

Fundamental analysis looks at the actual business behind the stock It examines

• The company’s financial health
• Growth potential
• Industry conditions
• Economic factors

This approach tries to determine if a stock offers good growth potential at a reasonable price. Investors typically use metrics like:

• Earnings per share (EPS)
• Price-to-earnings (P/E) ratio
• Revenue growth
• Dividend yield

What is Technical Analysis?

Technical analysis takes a completely different approach. Instead of examining the company itself, it focuses on:

• Stock price patterns
• Trading volume
• Statistical trends on stock charts

The core idea is that stock prices already reflect all available public information, so analyzing price movements can help predict future trends.

Why I Use Both Approaches

I’ve found that using both fundamental and technical analysis gives me the best results. Here’s how I typically approach it:

1. I use fundamental factors to select quality stock candidates
2. Then I use technical factors to determine when to buy or sell

This combination helps me identify good companies AND good entry points. Let’s dive deeper into how each strategy works.

Finding Growth Stocks: The Future Stars

When I’m looking for growth stocks, I’m focusing on companies with strong future prospects. These are often younger companies with innovative products or services that could disrupt their industries.

What I Look For in Growth Stocks:

1. Strong revenue growth (even if not yet profitable)
2. Innovative products or compelling competitive advantages
3. Expanding market share
4. High projected earnings growth

Many successful growth companies don’t pay dividends initially because they reinvest profits back into the business to fuel expansion. But their stock prices can rise significantly as more investors recognize their potential.

Finding Value Stocks: Hidden Gems at Bargain Prices

Value investing focuses on companies that appear underpriced compared to their fundamental worth. These are often established companies that may be temporarily out of favor with investors.

What I Look For in Value Stocks:

1. Low P/E ratios compared to industry peers
2. Prices below book value (total tangible assets minus liabilities)
3. Above-average dividend yields (but not suspiciously high)
4. Strong cash flow
5. Industry-leading positions

Warren Buffett is probably the most famous value investor, and he describes it as “buying wonderful companies at a fair price, not fair companies at a wonderful price.”

My Step-by-Step Process for Finding Good Stocks

Now let’s get practical. Here’s my actual process for finding promising stocks:

Step 1: Screen for Fundamental Factors

I start by narrowing down the universe of stocks using some basic screens. If you’re using an investment platform like Charles Schwab, you can use their stock screener tool.

For growth stocks, I typically look for:

• Revenue growth of at least 25% over the past three years
• Strong projected earnings growth
• Positive current-year EPS growth

For value stocks, I screen for:

• Above-average dividend yield (but not excessively high)
• Low P/E ratio compared to industry average
• Price below book value

Warning: Be careful with extremely high dividend yields – they’re often too good to be true and may indicate a company in trouble. Similarly, a low stock price doesn’t automatically mean a good value – it might reflect serious problems with the business.

Step 2: Apply Technical Screening

Once I have a manageable list of fundamentally strong candidates, I apply technical screens to find the best entry points.

I look at factors like:

Price and Market Cap: I eliminate stocks that don’t fit my investment parameters (for example, I might exclude stocks above $100 if that’s not in my budget).

Sectors and Industry Groups: I identify strong sectors and industries if I’m looking to buy, or weak ones if I’m considering short selling (though short selling involves significant risk and isn’t recommended for beginners).

Momentum Indicators: I check if stocks are in strong uptrends (for buying) or downtrends (for selling) using moving averages:

• Is the stock trading above its 20-day moving average?
• Has its 20-day moving average crossed above its 50-day moving average?
• Does it trade sufficient volume (at least 200,000 shares daily)?

Step 3: Scan Charts for Good Entry Points

After narrowing my list to a few candidates, I look for good entry points using chart patterns. I typically look for:

Breakouts: Sharp upward price movements after a period of trading sideways.

Pullbacks: Short-term moves opposite to the longer-term trend, providing a buying opportunity at a better price.

I also use indicators like the stochastic oscillator to confirm momentum:

• Values under 20 indicate “oversold” conditions (potential buying opportunity)
• Values over 80 suggest “overbought” conditions (might be time to sell)
• When the fast line (%K) crosses the slow line (%D), it can signal a change in momentum

Real-World Example: Choosing Between Two Stocks

Let’s imagine I’ve narrowed my choices to two stocks that both look fundamentally strong and have pulled back to their 20-day moving averages. How do I decide which one to buy?

I’ll look deeper at the technical signals:

Stock A:

• Unable to trade above previous day’s high
• Traded in a narrow range and closed near where it opened
• Stochastic oscillator not showing a bullish crossover
• Light volume during pullback (which is good)

Stock B:

• Traded above previous day’s high
• Closed near the top of its daily range
• Stochastic oscillator showing a bullish crossover (%K crossing above %D)
• Higher-than-average volume (showing buyer interest)

Based on these signals, Stock B shows stronger signs that its pullback is ending and the uptrend is resuming. It would be my choice between these two.

My Top Tips for Finding Good Stocks

After years of investing, I’ve learned these important lessons that I wish someone had told me when I started:

1. Be patient and selective: Don’t feel pressured to always be trading. Wait for the right opportunities.

2. Keep losses small: Even the best investors pick losers sometimes. What separates successful investors is they cut their losses quickly.

3. Consider both sides: Be willing to go short as well as long, depending on market conditions (but understand the risks of shorting).

4. Use both analyses: Fundamental analysis helps you find quality companies, while technical analysis helps you find good entry and exit points.

5. Start with blue-chip stocks: As a beginner, focus on established companies with strong track records before venturing into more speculative investments.

6. Check liquidity: Make sure the stocks you choose trade enough volume that you can easily buy and sell without affecting the price.

7. Don’t chase fads: Just because everyone’s talking about a stock doesn’t mean it’s a good investment. Do your own research.

Common Mistakes to Avoid When Picking Stocks

I’ve made plenty of mistakes in my investing journey. Here are some common ones to avoid:

1. Buying solely based on a low share price: A $5 stock isn’t necessarily cheaper than a $100 stock. What matters is the valuation relative to earnings, assets, and growth.

2. Ignoring diversification: Don’t put all your eggs in one basket, no matter how promising a single stock looks.

3. Falling in love with a stock: Emotional attachment to investments clouds judgment. Be prepared to sell when the fundamentals or technicals change.

4. Chasing past performance: Just because a stock performed well in the past doesn’t guarantee future results.

5. Ignoring the big picture: Even great companies can struggle during sector-wide or economic downturns.

The Bottom Line on Finding Good Stocks

Finding good stocks is part science, part art, and requires both analysis and discipline. By combining fundamental analysis to identify quality companies and technical analysis to find good entry points, you’ll significantly improve your chances of success.

Remember that even professional investors don’t get it right every time. The key is to have a systematic approach, stick to your strategy, and learn from both successes and failures.

I started my investing journey feeling overwhelmed by all the options, but by applying these principles consistently, I’ve been able to build a portfolio of solid performers. You can too!

Happy investing!

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