What is Stock picking? – Trading Strategy Tutorial

… better than average

Stock picking is the term used to describe an investment strategy or a component of an investment strategy in which an attempt is made to achieve an excess return (outperformance) over the market as a whole through targeted investment in individual companies/stocks. The shares are usually selected within the framework of a strategy according to certain fundamental and/or chart technical factors.

The objectives of stock picking do not necessarily have to be outperformance of the overall market. Other factors may also play a role, such as volatility, risk, ethical reasons, regular distributions, tax factors, etc.

Key takeaways

  • Targeted investment in individual shares is known as stock picking.
  • The aim is usually to achieve an excess return.
  • Well-known stock picking strategies include value investing, growth investing and dividend strategies.

How does stock picking work?

Selection criteria & strategies

There are numerous different investment strategies that rely on stock picking. The objectives of each strategy as well as the selection criteria for the stocks are different.

Selection Criteria

When selecting shares, fundamental stock figures often play a role, such as

  • KBV
  • Dividend yield
  • Discounted cash flow
  • Market capitalization
  • etc.

Subjective assessments can also play a role, for example

  • unique selling point of the company
  • Insolvency risk
  • current industry trends
  • etc.

Furthermore, stocks can be selected according to technical chart criteria. The following factors, among others, are taken into account:

  • Trend
  • Momentum
  • Moving averages
  • Relative strength
  • Volume
  • etc.

Stock picking strategies

As the term “stock picking” is relatively vague and various investment strategies can be described as stock picking strategies, you will find below an overview of some of the most well-known strategies, as well as a link to a detailed article on the respective strategy.

value investing

Value investors use fundamental valuation criteria to determine the intrinsic value of a company and buy shares for which the intrinsic value is favourable in relation to the current market value. In doing so, they focus on companies that have already proven in the past that their business model is profitable and for which there is a high probability that stable or increasing sales and profits can be expected in the future.

growth investing

Growth investing involves investing in companies with high growth potential. The aim is to find stocks that will significantly outperform the market as a whole in the coming years. These are often companies with new and innovative products and services. However, the high price potential is also associated with an increased risk.

Dividend strategy

The dividend strategy focuses on companies that pay an above-average dividend or have an above-average dividend yield. On the one hand, the goal can be to achieve a regular cash flow. In addition, shares with a long-term stable or rising dividend history are often regarded as crisis-proof and profitable in the long term.

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