Over the years I have been asked many times  to explain how to identify the best stocks or shares to buy, and more importantly when to sell when you move from practice trading on stock market games, to trading for real.  I hope you will find the following  system both simple to use, and easy to follow. It is the one I use for my own trading and investing, and so far it has never let me down. Although it is not perfect, it is very simple, and provided you follow all the steps you will end up picking good quality solid stocks whether you are playing the stock market simulation game or real stocks in the stock market.

Now whether you are trading for real, or simply learning and having fun with the stock market game, the system is equally valid so please try it out for stock picking in your fantasy stock game as it will work just as well.

Now the first step sounds obvious but it is extremely important. Before you start trading you need a trading plan. I know it sounds boring, but if you want to be successful you have to have the discipline to sit down and write one. Think about it this way – suppose you go to see your financial advisor as you wanted to invest some money. The first question he or she would ask is how much are you looking to invest, which is not an unreasonable question. The next question might be about your view of risk and what markets you would feel comfortable investing in – higher risks yield higher rewards but greater losses and conversely lower risks yield lower rewards, but smaller losses. Then they might ask on what you are looking for from your investments – capital growth, short term income, long term income. Your age and medium to long term business and personal goals would probably be discussed and considered, and finally after a meeting of perhaps an hour or two, you would agree on the most appropriate investments which meet your personal and financial objectives, and at a risk level within your comfort zone. In essence what your advisor has done, is to go through the various questions you need to ask yourself, in order to produce a trading plan.  I have devoted an entire site to this one topic of how to develop and write a trading plan. Not having a plan is the single most common reason that traders and investors fail. The plan does not have to be complicated, or take a long time to develop, but you must have it written down, and

Having written our trading plan, which I stress again can be very simple and uncomplicated, we are now ready to start our search for the best stocks and shares to buy. So where do I start? – whilst I am principally a technical trader, I firmly believe that you need to understand the broad fundamentals which provide the framework against which to trade. Naturally if you are a currency scalper with trades lasting only a few minutes then the fundamentals are unimportant. For stocks and shares however, where you are holding open positions for days, months or even years, then you need to have a fundamental view of the world and domestic economy. If the terms fundamental or technical are new terms to you, please just follow the link and all will be explained. So where do I start ? – start with the big picture and work your way down!

Start by thinking about the world economy – it is a very small place nowadays, and the influence of one country on another can be dramatic. Read the business press for general views about the world economic outlook. Which countries are in recession or likely to be in the future, which are expanding, what are the raw materials and commodities that these countries will require in the future. In the last few years, oil and commodities have soared, along with mining stocks and related industries. When major economies expand the demand is for raw materials and heavy engineering, so those companies involved in extraction and refining will tend to do well. Support service companies will also tend to perform well. Those involved in secondary processes such as steel producers should also see their stock rise in value as demand increases. Oil is another vital resource which is always in demand. With prices at $100 per barrel the extracting, refining, and support companies will be generating exceptional profits. Look at Canada as the next major exporter of oil to the US. Any companies currently involved in the Albert sands extraction should produce excellent results in the next few years. Try to think longer term and laterally if possible. Green issues are becoming increasingly important so any companies involved in production or supply of alternative energy sources may do particularly well. Think about issues such as plastic, which is rapidly becoming regarded as one of the most anti-social forms of packaging available. Is investing in such stocks a good long term investment, particularly with many countries around the world likely to start major campaigns against the use of plastic bags – simplistic maybe, but this is the way I think when considering which stocks to buy.

From the world economy we move to the country economy, so as a US investor you would look at the US economy, and on the other side of the pond at the UK economy. Let’s assume we are a US investor – would we look at the housing market or financial services as a area of investment? The answer at the moment is probably not, so where would we look? Well everyone always needs to eat, and when times get tough the luxuries go and the essentials take top priority. So any companies in the luxury/leisure markets such as restaurants, holidays, entertainment, luxury goods, we would need to consider very carefully. Utility companies could do well as investors often look for safe havens when the economic outlook is uncertain – heat and light are still a priority. Consider wholesalers and retailers in basics such as foods and foodstuffs, both manufacturers and food processors. With ageing populations and greater life expectancy, perhaps we should look at major drug companies, nursing homes, healthcare companies etc. Remember that the markets will always lead the economy as long term trends take time to filter through. If you use common sense judgement and your own ‘radar’ you will pick up what is happening just by talking to colleagues, friends, suppliers or customers. Read the quality press, listen to TV comment but try to avoid the ‘experts’ – if they knew anything of value they would be making their own money, not being paid to tell you what’s happening!!