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Stock Market Data Calculations - Choosing Stocks Part 1/2 - Data Sources

Jun 21, 2008
Investors have a vast amount of information available purporting to help them choose what investments to make. It is up to the individual investor to select which they will allow to help them make decisions and which they will disregard. Sometimes this comes at the price of a bad investment on bad advice. So the question posed is: "How can I gauge which pieces of stock advice to trust and which I should not?"

Part of the answer, at least, lies in knowing what to look for and what not to consider for. It also depends, to a very large degree, on the comfort level you have in the tools and tips you use. Just about every idea that is out there has worked to make someone money in the market, that's why it's there - but is that method good for you?

Evaluating Stock Information (data)

I classify the various kinds stock advice into for categories: Promotions, Picks, Surveys, and Research. Most information is a combination of these categories so I like to rate all incoming information on a sliding 'risk' scale of these four methods - in the order given. Promotions are the least dependable at the top of the scale and research is at the bottom - providing the most security. By considering stock advice in this manner I can 'rank' the level of confidence I have for any incoming information.

Lets explore what each of these in a little detail

Promoted Stocks (often penny stocks) - riskiest: I find these in my email (daily) and at various places all over the web. The motivation behind these promotions may not be to make you money, the 'promoter' may be the only beneficiary. But depending upon how well they do their job, they can drastically influence a stocks price. However, when I look into their current offerings, I often find that I am too late to get in on the profit - and I am never certain of the best time to get out. The best, maybe only way to use this information is to take a gain and get out - fast. Promoted stocks are almost never good candidates for long-term investors.

Picks- moderate risk: Picks come from a plethora of sources for a myriad of reasons, and it could be said that a plethora times a myriad equals confusion. All I can say about picks is: do your own research and follow only those that provide sufficient reasoning. Unfortunately I have found that picks are not always based on any relevant information and are often just a cover for promoted stocks

Surveys - less risky not specific: What I am defining as a survey is a broader look at the different sectors and indexes of the market. You find this type of information in news articles and various other (usually reliable) data sources. They are, for example, when you find something that says technology stocks are 'hot' or real estate is in a decline. This may or may not be directly reflected in the price of individual stock in these sectors. My advice on this subject is to get to know several sectors well and thus you will know how individual stocks will react depending upon the survey of their respective sectors and indexes.

Research: Research is the most reliable method of choosing a stock and, as I see it, has 2 parts.

- The first is evaluating the numbers: ratios (P/E), returns, margins, trends and of course price - just where does this stock stand today. There are volumes of books that can tell you how to use this information, but I have found the best and quickest way to learn them is to follow them in various stocks and indexes to get a feel for what they really mean and what they mean for that individual stock - every stock is different.

- The second comes from evaluating the psychology or feel of the market and can often be found in the small print of the previous three methods I have described. It is what you would expect when you see things such as analysts recommendation, but you can't always be certain which of these factors they have taken into consideration and how they have been weighted. If you want to trust an analyst you must get to know their methods first.

All of these things seem fairly self evident, the point that I would like to get across is that a users should learn to trust his or her own confidence level (or "gut" if you wish), and that the best way to do this would be to practice with each of these methods from promotions to research until you find which combination works.

If it sounds like I'm promoting research I am, but research can encompass all of the data sources I have mentioned. Where I have found that research really comes in handy is if it is done beforehand. That is to say you have already decided "If I ever see this then that would mean this" (replace what you want for 'this'). The natural human tendency to see things the way you want to see them (not necessarily the way they are) is thereby eliminated and give you an action to pursue once the 'this' occurs.
About the Author
Stock Calculations (http://www.StockCalculations.com) is a complete macro research package. We'll do the macro, you do the micro. When it comes to manipulating stock data, it's is a real time saver. Stock Calculations completes a total package for wise investing.
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