How to Pick Stocks

When investing, there are several ways to pick the stock to buy (or sell). In this beginner’s guide to stock picking we will look at some methods used by professional stock pickers. Knowing how stock analysts come to their conclusions will help you to understand what they are saying and why they are saying it. Putting to use some of their methodology and reasoning will also allow you to start selecting your own stocks. In turn this will make investing a more enjoyable process, and more profitable – but remember: practice makes perfect.

Analysts, professional investors, and traders use two types of analytical approach: fundamental analysis and technical analysis.

Top Stock Brokers in the UK

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    You can trade a dozen major indices, including the Dow Jones, NASDAQ and S&P 500 with competitive spreads at FXCC. However, it’s disappointing that FXCC doesn’t offer any individual stocks - a huge drawback against competitors like CMC Markets, which offers thousands of shares.

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    RoboForex provides one of the broadest selections of real equities and stock CFDs spanning the US and 14 regional European markets, including direct access to the NASDAQ. It’s also one of the few brokers to offer a dedicated platform for stock trading, sporting leverage up to 1:20 and a robot builder that enables traders to automate and backtest stock trading strategies.

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    There are hundreds of major global shares and indices available. You can also trade IPO shares and ETFs in the MT4 platform, depending on jurisdiction. You can expect a reasonable 0.1% commission on US shares, plus a range of analysis features to help you stay ahead of stock market news.

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    FOREX.com provides access to a wide array of US, EU, and UK stock CFDs, featuring spreads as narrow as 1 point. This enables you to speculate on established household names and emerging IPOs, fostering ample opportunities for diversification within stock portfolios. US stocks are accessible from as low as 1.8 cents per share.

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    Eightcap offers 590+ US, Australian, and European shares as well as a modest range of indices, including the Dow Jones and FTSE. Its Labs offer excellent educational tools, notably the ‘Navigating Stock Market Volatility’ guide, while Capitalise.ai lets you automate stock trading strategies in plain English. On the downside, Eightcap still doesn’t offer fractional shares for budget traders, which are available at brokers like XTB.

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    OANDA expanded its suite of stocks in 2024 with more than 2,200 shares now available from leading stock exchanges, including blue chip firms like Apple and Meta. There are also no commissions on US stocks and traders benefit from free insights and market reports from Dow Jones and Oanda’s MarketPulse research tool.

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    eToro offers access to thousands of stocks and shares from all over Europe, the US and beyond, with new opportunities on Dubai's top stocks added in 2024. Traders can invest alone or join millions of other traders in eToro's popular social trading community. Buy-and-hold investors can also try out the broker's Smart Portfolios, covering exciting thematic collections like Big Tech.

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    FxPro offers a strong selection of stock CFDs, covering over 2,000 equities from prominent US and European stock exchanges, including big names like Tesla and Apple. The broker also continues to expand its financial services through its BnkPro e-money and investment products.

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    City Index offers thousands of global shares via CFDs and spread bets. Pre-market and after-hours trading is also available on 70+ US stocks, including Tesla and Apple.

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    Plus500 continues to offer an extensive range of shares across UK, US, and European markets via CFDs. The ESG and cannabis sector opportunities are also enticing features not commonly found among other platforms. There also an impressive 30+ indices available with leverage up to 1:20.

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    You can trade a decent range of US and European share CFDs, with 1:5 leverage. There’s also a competitive choice of ETFs and indices across the three available platforms. It’s easy to stay updated with the stock market using the broker’s customizable trading alerts and the in-platform news feed.

  12. Axi

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    Axi has expanded its range of stock CFDs over the years, now providing opportunities in major markets like the US, UK, Europe and Hong Kong, though it still lacks the market access of category leaders. What’s really neat is the Axi Academy, especially the Share CFDs Trading Course 101 that’s a great starting point for beginners.

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    IBKR provides access to an unparalleled array of equity products originating from 24 diverse countries. Whether seeking capital appreciation, dividends, or voting rights, you can directly invest in stocks. Alternatively, you can engage in speculative trading on price movements through CFDs, futures and more than 13,000 ETFs. IBKR also enhanced its European equity derivatives offering in 2024 by adding trading on CBOE Europe Derivatives (CEDX).

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    IG offers 13,000+ shares to trade or invest in, with more listed firms than nearly every competitor. The broker also excels for its zero commissions on US shares, while out-of-hours trading provides access to 70+ shares, plus popular ETFs and trusts, when the markets are closed.

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    Trade binary options and CFDs on global stocks from US, European, Russian and Asian exchanges, as well as 37 indices covering a wide range of global markets. The access to stocks trumps many binary options brokers.

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    CMC provides opportunities on over 10,000 stock CFDs and offers reliable support during market hours based on tests. You also gain complimentary access to new and excellent analysis from reputable third-party outlets. On the downside, there’s no trading in real stocks in some countries.

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    IC Markets offers access to 2,100+ stocks from Australian and US markets - NASDAQ, NYSE and ASX. You can choose between 4 platforms, though cTrader excels for seasoned stock traders looking for the widest range of indicators, timeframes and chart types. Over 25 indices also provide exposure to diverse regions and economies.

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    Focus Option traders can access 21 global stocks via high/low binary options through a web-based platform or CFDs via a mobile app. This includes big firms like IBM, Tesla and Microsoft.

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    You can trade an excellent suite of 2000+ US stocks, fractional shares, options, ETFs, OTC and ADRs. There are no commissions on most assets. Additionally, extended hours trading is offered as well as optimized screeners and custom watchlists to aid investment decisions.

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    OspreyFX offers leveraged trading on US and European stocks and shares. There are no restrictions on strategies and traders benefit from competitive, real-time pricing and access to industry-leading software from MetaTrader.

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    Invest in over 40,000 US, UK and international stocks from 17 leading exchanges. The selection of shares beats most competitors while prices are fixed and transparent.

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    Trade 25+ global stocks with CFDs commission-free with fast execution and STP pricing. This is a narrow selection vs competitors, focussed on US markets. Eight indices are also available to speculate on the movements of US, European, UK and Australian markets.

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    Errante offers CFDs on 58 stocks of some of the world's largest companies. Trade big names like Alibaba, Amazon and Apple with low fees. Traders also benefit from top-tier liquidity and fast execution, but note that as these are CFDs, you cannot buy and own physical shares.

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    Clients get commission-free exposure to US, EU, Asian and Russian stock markets on both the MT4 and MT5 platforms. Traders can also save time by utilizing the automated stock market insights in the AutoChartist scanning tool.

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    Coinexx traders can speculate on broad movements of global markets via five indices covering exchanges in the US, UK, Germany, and China. On the downside, there are no individual stocks which is a significant drawback.

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    You can trade a decent range of CFD shares from US, UK and EU markets, as well as 40+ ETFs and a variety of indices. US stocks are commission-free and you can get started with just a $100 minimum deposit. That said, it’s disappointing that there’s no stock market analysis on offer.

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    Trade CFDs on 25 global stocks including Alibaba, Netflix and Tesla. This is a very limited selection, but traders can also make highly leveraged bets on 18 indices covering a wide range of global countries and regions including the US, Europe, Russia, China and Japan.

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    Access a modest selection of 60+ US and European company stocks including Amazon and Volkswagen. Major global indices like the S&P 500 and FTSE 100 are also available. Stock traders can enjoy convenient access to the MT4 platform via desktop, web browser and mobile.

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    Firstrade offers commission-free stock trading on the NASDAQ, NYSE and OTC markets. Clients can invest in penny stocks through to blue chip stocks with extended hours trading, plus conditional orders and trailing stops. We also rated the dividend reinvestment program.

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    World Forex traders can speculate on price movements of 40+ stocks with CFDs and digital contracts with no commissions, tight spreads and high payouts. You can take positions on big names like IBM and American Express.

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    With 300+ stock CFDs from a variety of global exchanges, traders can choose between some of the world's biggest blue chip companies. FinPros charges no commission fees for shares trading, making this a competitive offering although not as diverse as some alternatives.

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    Traders can speculate on broad stock market movements by trading on 14 major indices, including the FTSE 100, S&P 500 and Dax 30. Clients can analyze stock market movements on leading trading software from MetaQuotes.

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    Trade CFDs on 134 high-market-cap US and global stocks including Alibaba, Microsoft and Pfizer. You can also speculate on broader market movements through 35 indices covering major global exchanges.

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    Take positions on major brands in multiple industries, from finance to manufacturing and technology. Popular indices like the Dow Jones also offer more diverse access to popular markets.

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    Zacks Trade offers a large selection of US and international stocks, including penny stocks, as well as ETFs and global indices. The broker also offers options as a way to speculate on stock price movements.

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    Buy and own thousands of shares commission-free, including blue chip companies like Apple and Microsoft from the NYSE and NASDAQ exchanges. Fractional shares also allow investments from as little as $1, which will appeal to beginners and those on a budget.

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    Scope Markets offers stock trading on 1500+ popular markets, as well as a decent range of cash and futures indices. Traders looking to diversify can explore some other interesting opportunities, like cannabis stocks. There are also some useful resources to help inform trading decisions, including a dividend calendar.

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    Traders who sign up to TMGM's IRESS account can access the broker's vast selection of around 10,000 stock CFDs, sourced from 12 global exchanges in the US, UK, Australia, EU, Hong Kong and Japan. This is one of the best ranges of equities of any CFD broker.

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    Anzo Capital traders can trade 30 US and European company stocks as well as several stock indices. Trading is done through CFDs, meaning traders do not own the underlying asset and can bet on rising and falling prices.

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    That said, I find the range of just 86 shares products is very limited compared to most other brands. The good news is that spreads are pretty competitive, coming in at around 0.11 for the Twitter (X) stock.

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    Rock Global traders can either trade company shares directly or speculate on stock markets via CFDs. The broker covers an excellent range of markets spanning Asia-Pacific, North America and Europe. Brokerage fees start at $9.95 for US shares.

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    Traders can access an excellent choice of 800+ share CFDs with up to 1:20 leverage and the option to trade with zero commission. The diverse selection covers US, EU, UK and HK exchanges, which should offer plenty of opportunities for more experienced investors.

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    Pocket Option continues to trail alternatives in the stock department with just several dozen of the most popular shares like Microsoft and Google. That said, the payouts are competitive on stocks reaching 92% while indices offer an alternative way to speculate on stock markets with returns up to 67%.

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    Exinity clients can speculate on shares from US and Hong Kong companies. Traders can choose between trading stock CFDs or directly buying stocks in large firms commission-free. On the negative side, there are no equities from European and UK markets.

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    xChief offers 100 US company stock CFDs for MT4 DirectFX and Classic+ account holders. Alongside popular multinationals like Apple and Coca-Cola, you can also speculate on several major stock indices with spreads from 2.

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    PU Prime traders can access CFDs on hundreds of shares from international exchanges, including some of the world’s top companies like Amazon, VISA, Tesla, and IBM. Stock trading takes place on the MT5 platform and features floating spreads starting near 0 but varying by account type and equity. Stocks are traded via CFD derivatives and are not directly owned. UK and US stocks all have 0 commissions.

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    SuperForex offers CFDs on a range of international stocks, with big names including Google, Disney and Apple as well as regional powerhouses such as Petrobras. This is not the widest range of stocks, but there is a diverse enough list to keep traders interested, especially beginners.

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    AdroFx offers 40+ stock CFDs on major US companies, including Tesla and Microsoft. These can be traded with leverage, but as they are CFDs you will not directly own a share in the companies. Also, the number of shares is woeful compared to alternatives like CMC Markets which offers over 10,000 stocks spanning different regions and sectors.

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    Invest in thousands of stocks and ETFs with no commissions or overnight fees. You can also make use of the broker's blog which publishes frequent stock market updates and investment ideas.

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    Speculate on price movements of 37 US and European blue chip stock CFDs, including Adidas, Intel and Volkswagen. On the negative side, the selection of stocks is limited vs alternatives and direct share dealing isn't provided.

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    You can trade a modest range of 140+ US and EU shares, including Amazon and Pfizer. There are also 13 major indices, providing exposure to other global economies. Average spreads are competitive, coming in at 0.12 pips for the Apple stock and 1.9 pips for NASDAQ.

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    Trade 20,000+ global equities with margins as low as 5% and powerful trading platforms. The selection of shares outstrips nearly all competitors and includes access to blue chip stocks.

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    Trade 6000+ US and UK stocks and hundreds of ETFs and funds with zero commissions and low fees via an easy-to-use proprietary trading app. More than a million users trust Freetrade for stock investing.

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    I was also pleased to find over 5000 stocks and options available to trade on several platforms, as well as 9 stock indices. Active traders can also enjoy flexible commission plans, superior low-latency DMA and a dedicated customer support line.

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    Global Prime traders cannot speculate on individual stock prices, but they can trade 12 global stock index CFDs with tight spreads, including the Dow Jones, UK 100, NASDAQ and S&P 500.

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    Access UK, European and Asian shares with a good selection of flexible deposit methods. The broker's useful educational insights can also help you develop robust strategies and stock analysis techniques.

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    Trade US, European and Asian markets with thousands of equities and competitive spreads. You can also take advantage of DMA pricing on the broker's MT5 platform, as well as IPOs.

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    As well as Just2Trade's 50+ stock CFDs, traders can access a huge variety of thousands of stocks traded on US and international exchanges. The chance to build an investment portfolio and benefit from dividends sets Just2Trade apart from most CFD brokers.

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    Direct stock trading isn't available, but traders can access 11 index CFDs, including the top US, British, European, Australian, and Japanese indices, with leverage up to 1:200.

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    Trade over 1000 stocks from US, UK and European markets with no commissions. Equities can be traded on the intuitive ActivTrader platform or third-party solutions, while the economic calendar can be used to plan potential trades. Fractional shares are also available, making high-value stocks accessible to newer traders.

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    BlackBull offers CFD trading on a market-leading range of 26000+ company shares, along with a growing selection of indices now featuring Asian equity indices. Spreads are competitive based on tests, with Apple coming in at 0.04. BlackBull has also introduced BlackBull Invest, providing direct share dealing for alternative trading options.

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    Swissquote offers access to leading stock exchanges from Switzerland, US, UK, Germany, France and Japan. Stocks are available with a 0.15% commission on the Premium account. Traders also get a choice of leading platforms, including MT4, MT5 and Advanced Trader.

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    SimpleFX offers a beginner-friendly platform to trade some of the most popular global stock CFDs commission-free, from Pfizer to Walt Disney, equipped with advanced integrated indicators. SimpleFX provides access to stock exchanges in key countries such as the US, UK, Germany, and Japan, though it doesn't offer fractional shares.

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    You can trade 70+ of the most popular global stocks including Amazon and Tesla, as well as 10+ major indices. This isn’t particularly competitive compared to the hundreds offered by most alternatives, and the lack of additional analysis tools will disappoint seasoned stock traders.

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    You can trade a small range of around 20 major NYSE and NASDAQ-listed stocks, including Apple, Google and Amazon. Commissions are also uncompetitive at $16 per round turn - over double the rate at most other brokers.

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    Traders can speculate on stock market movements through CFDs on dozens of individual equities. This is less than many rival brokers, but traders can also place bets on broad market movements through 15 indices covering diverse global markets including the US, China, UK, Spain and Germany.

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    FXTrading offers clients CFDs on 10,000+ global company shares from a list that includes all major and emerging stock exchanges on an institutional trading platform. Prices are competitive with a floating spread and leverage of 1:10 is available.

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    Trade hundreds of stocks from leading countries and economics, including Apple and Amazon in the US. 24/5 support is also available to help new stock traders get started with the broker.

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    Trade CFDs on some of the largest stocks in the US and EU including big brands like Microsoft and Google. In total, 70+ global stock CFDs are available with leverage up to 1:5.

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    Fortrade offers leveraged CFDs on a wide range of stocks from the UK, US, Hong Kong, Australia and a range of European companies with variable spreads and no commissions. CFDs are derivative contracts that do not entail ownership of the underlying stock. Professional traders can also access a decent list of Direct Market Access stocks.

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    FP Markets offers CFDs on over 10,000 international stocks across a wide range of global markets, including exchanges in London, Hong Kong, Paris, Frankfurt, Madrid, Amsterdam, and New York. Yet while the broker offers extensive coverage in CFD trading, it does not support real stock trading or long-term investing.

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    IronFX traders can speculate on price movements of 150 US, UK and European shares via CFDs. Fractional shares are also available, which will appeal to beginners looking to trade in smaller volumes. There’s also a decent range of 15+ indices via spot and futures contracts.

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    Trade CFDs on an impressive range of 3400+ stocks from 17 different global exchanges with low commissions. Traders can also buy and own company shares directly with low commissions and fee-free trades available daily from some exchanges, and fractional share trading allowing micro-investments in international giants.

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    You can trade 68 stocks and shares with leverage of 1:5, as well as 4 indices: Dow Jones, Nasdaq, S&P 500 and DAX 30. This is a poor selection compared to most alternatives (who typically offer hundreds) and only covers US and German markets.

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    HYCM offers 11 individual company shares to trade via the MT4 platform. There are also 20 ETFs to give a broader view of market movements. All trading is done through CFDs, meaning traders will not own the underlying equities.

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    FXOpen has expanded its suite of stocks, now offering 500+ shares from US, UK and Hong Kong stock exchanges, including big names like Apple and Meta. An economic calendar, dividend calendar and analyst insights into major stock price movements are also on-hand to inform trading decisions.

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    Trade 750 stock CFDs sourced from eight exchanges from the US, EU and UK. Leverage up to 1:10 is available, commissions start from $6 and overnight fees are the LIBOR rate +/-3.5%. This represents a very competitive suite of stocks from a range of international markets covered by few competitors.

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    Hantec Markets offers more than 1,800 stock CFDs from exchanges in Europe, the UK, and the US. Additionally, the broker offers access to major indices including the S&P 500 and FTSE 100, allowing traders to gain a comprehensive perspective on global financial markets. On the downside, there is no option to invest in real stocks or factional shares, available at XTB.

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    Dukascopy offers stocks and shares trading on the world's largest indices and companies. Users have access to North America, Europe and the Pacific region with competitive pricing. The broker's market research, including its technical and fundamental analysis, trading ideas and TV channel, are standout features for us.

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    Stocks can be traded by connecting the NinjaTrader platform to supporting brokers. The firm also provides access to a range of index futures via standard and micro contracts, including the E-Mini S&P 500 Index Futures and E-Mini Russell 2000 Index Futures.

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    GO Markets offers CFDs on stocks from US, UK, Hong Kong, Australian and German exchanges with 1:5 leverage, commissions from 0.08%, tight variable spreads, and access to powerful analysis tools on MetaTrader 5. Derivatives trading means traders will not own the underlying asset.

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    Access 23,500+ stocks from global markets with a $1 minimum commission on US shares and comprehensive market insights.

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    Trade thousands of global equities through spread betting and CFDs. Spreadex is one of the few online brokers to provide trading opportunities on a selection of lower market cap equities traded on exchanges such as the AIM sub-market of the London Stock Exchange.

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    Although the broker doesn’t offer real stocks, clients can trade CFDs on an impressive list of 3000+ shares with low commissions from $3.50 per side and no hidden fees. Spreads are also competitive, coming in at 0.08 pips for the Apple stock.

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    Traders can speculate on leading companies in the US, EU, UK and Australia including brands like Tesla and Apple. Short, medium and long-term trading strategies are catered for, as well as algo traders through Expert Advisors (EAs). There is also an excellent range of indices and ETFs for those who want to diversify portfolios.

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    Traders can take positions on thousands of stock CFDs sourced from various global markets, including the US, UK, EU, China, and Japan. For longer-term investors, Trading 212 facilitates direct share dealing on more than 8,500 global stocks within investment accounts and tax-efficient ISAs for UK customers. The key selling point is the zero commissions on equities.

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    Pepperstone presents a huge suite of share CFDs spanning the US, UK, Australian, and European stock markets. Whether you’re interested in iconic names like Tesla, Apple, or Netflix, Pepperstone provides the flexibility to take long or short positions, backed by deep liquidity and competitive commissions. The platform has also introduced 24-hour trading on 37 US stock CFDs, providing opportunities to trade following earnings reports and unexpected news.

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    FXTM offers a modest selection of several hundred US and European stock CFDs, with Advantage account spreads starting from just 0.1. You can also trade over 500 real shares from US exchanges. What’s great is the wealth of expertly curated market analysis to informed decision-making.

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    Trade dozens of shares in major US, European, and Asian companies.

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    You can trade major indices including the NASDAQ, S&P 500 and Nikkei. There’s a powerful platform for technical and fundamental analysis of the market, although it’s a shame that shares are not offered.

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    Despite introducing shares in 2019 and bolstering its range of equities, notably in 2021 and 2022, easyMarkets still only offers a modest selection of stocks from US, European and Asian markets. Its roster is tilted toward technology, finance and consumer goods based on our latest tests.

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    FXCM offers a strong suite of shares from the US, UK, Hong Kong, Australia and Europe. Extended hours trading is available on US shares, aligning the broker with top brands like IG. Additionally, fractional shares are available for those who want more control over their position sizes.

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    100+ stock CFDs are available spanning some of the biggest US companies with zero commissions. The economic calendar is great for tracking major events which could impact stock prices. However, Fusion only offers US shares whereas competitors like IC Markets provide 2000+ shares including Australian stocks.

  94. XTB

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    XTB offers 3548 real stocks 2042 CFDs on stocks (CFD and real), encompassing prominent companies such as Amazon, Barclays, and BMW, with zero commissions. The xStation platform also shines for its analysis features that elevate the stock trading experience, from stock scanners and heatmaps to diverse fundamental data, including market cap and P/E ratios.

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    Trader can access global stock markets through binary options on blue chip company shares and a range of indices. Clients can trade high/low binaries on a user-friendly web platform.

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    AZAForex offers trading on a modest range of US stocks including Google, Apple and Amazon. You can also speculate on leading indices such as the FTSE.

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    Go long or short on over 50 major global shares and map out your strategies using the intuitive charting tools. Those with $1,000+ starting capital can also enjoy their first 3 trades risk-free.

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    Capital.com offer 5,600+ stocks from around the globe. They also offer tight spreads, ideal for active traders

Fundamental Analysis

An analyst will compare stocks against other like-minded stocks, and also against the broader economy. He will use up-to-date data, speak to company management, and all this information will be used to form the basis of an investment recommendation: the buy, sell, or hold.

Fundamental analysis examines the financials of a company. Of most concern are numbers such as sales revenue, profit, cash flow, etc. All these numbers can be used in various formulas to produce a standard set of ratios, and then these ratios can be used to compare different companies against each other, as well as note relative current performance against historic performance.

Results and prospects can be measured by reference to profit margins, return on equity and return on investment ratios, as well as prospects for future earnings. Taken into consideration will be political climate, economic outlook, changes in laws and regulations, and also geographic influences (particularly when measuring the performance of multi-national companies).

Fundamental analysis can be conducted on a top down basis, where emphasis is placed upon the economy, then business sector, then finally the individual company, or a bottom up approach where the order of importance is reversed.

Those that adhere to the fundamental analytical approach understand that markets sometimes move by relatively large amounts on a daily basis, but believe that these moves are no more than background noise which should be largely ignored. Sentiment and fear drive the market on a day-to-day basis, but company fundamentals do not do so. Just because the market has fallen because of, let’s say a war between the two Koreas, and dragged down the share price of ABC does not mean the prospects for ABC have fallen off the edge of a cliff.

Fundamental investors tend to have a long term outlook, searching for companies they believe to be relatively undervalued and then investing in these. To make this stock and direction selections various fundamental analysis ratios are employed, including the following:

Earnings Per Share (EPS)

This is the net earnings made by the company divided by the number of shares. This ratio allows the earnings of companies to be easily and cleanly compared to each other. The higher this number, the more profit per dollar investor capital is being made.

Price to Earnings Ratio (P/E)

This is simply the current share price divided by the annual earnings per share. This will give a number that represents how many years of earnings at current levels will be required to recoup the value of one share. Easily calculated and understood, it is one of the most common ratios used to compare relative valuations of stocks against each other and the broader market.

Dividend Yield

The dividend yield is another easy to calculate ratio, and is expressed as a percentage. It is the amount of annual dividend expressed as a percentage of the share price (dividend/ share price x 100). This makes it easy for income investors to compare stocks against each other, and also to other income yielding investments such as bank accounts and bonds.

Projected Earnings Growth (PEG)

The PEG is a forward looking ratio, because it is based on anticipated earnings growth. It is calculated by dividing the P/E by the projected rate of growth in earnings.

For example, a stock with a P/E of 15 and a projected rate of earnings growth of 10% would have a PEG of 1.5 (15/10). This number can then be used to compare against other similar stocks to examine relative forward valuations.

Technical Analysis

This is almost a polar opposite approach to fundamental analysis (you can read more about technical analysis in our section here).  Those that put their store in technical analysis don’t care about a company. What they care about is the price movement of its shares. Historic price action is charted to build up a picture of the pattern of price movement, and this pattern is used to predict future price movements, often short term. These charts can be in the form of bars, candlesticks, or lines and various standard chart indicators will give buy and sell signals.

Technical analysis is much more about the sentiment of the market than the fundamentals of the market. Prices move on a daily, even minute by minute basis, and it is these moves that an investor using technical analysis will hope to profit from. Investment outlook is therefore much shorter term, and many day traders use technical analysis and charts to make trading decisions.

Technical analysts also use standard formulas to help them, but where fundamentalists use revenues, earnings, and share price to build ratios to compare one company to another, a technical analyst will use the stock price and rate of change to measure the volatility of a share price. Common ratios used by technical analysts, either for the number itself or as a way of building a chart, include:

Relative Strength Indicator (RSI)

The RSI is a technical indicator of price momentum. It compares the size of recent gains to the size of recent losses to establish oversold and overbought positions, and possible turning points in short term price trend. It is calculated using the exponential moving averages of the last 14 days closing gains and closing losses. The formula for its calculation is:

RSI = 100 – (100/ (1+RS))

where RS = 14 day ema of closing gains/ 14 day ema of closing losses.

The RSI will always fall between 0 and 100, a figure above 80 indicating an overbought position and the opportunity to profit by selling, and below 20 indicating an oversold position and the opportunity to profit by buying.

Moving Average Convergence Divergence (MACD)

The MACD is one of the possibly the most common price momentum indicator.  It uses a short exponential moving average (ema – the running average over a set period of days, typically 12 days) and subtracts a long ema (typically 26 days) to calculate the MACD. This line is plotted over a period of time on a graph. Then a shorter ema (usually 9 days) is plotted on the same graph as a signal line. The crossing of the MACD by the signal line indicates turning points in the rise and fall of the share price – when the signal moves above the MACD it is considered a buy signal, and when it moves below it is considered a sell. Most commonly a bar graph of volume traded will accompany the MACD to help confirm these trend reversals.

The Fibonacci Retracement

Leonardo Fibonacci formed this mathematical theory. Each number in a Fibonacci sequence is the sum of the two preceding numbers. The exciting bit is that the quotient of the adjacent numbers is about 1.618 (the inverse of which is 0.618). Not exciting, you say? Well consider this: everything in nature seems to be built around this proportion, and for this reason it is often called the ‘golden ratio’.

In the markets, this golden ratio is translated to three percentages: 38.2%, 50% and 61.8%. One of the uses of these ratios is what is known as the Fibonacci Retracement.

On a graph after a significant move up or down, five lines are drawn. The first is at the high, the second at the low. Between these lines, three further lines, at 61.8% of the difference, 50% of the difference, and 38.2% of the difference are drawn. These lines represent new areas of support and resistance as the stocks retraces its significant move.

What Stock Picking Method Should You Use?

For passive traders, those that want their investments managed by someone else, understanding these methods of analysis and stock valuation will help to understand why portfolio values move up and down. For those that want a more active involvement in the management of their portfolio, then the choice of how to value stocks will depend upon investment and trading philosophy.

You may wish to hold stocks for a long period of time, in which case fundamental analysis will be perfect, or enjoy the excitement of shorter term market swings, in which case technical analysis and a chartist approach might serve better. Some may combine the two, holding a long term position chosen for fundamental reasons and trading around that position with the noise identified by technical analysis.

Whichever method you choose, remember that neither gives the complete picture 100% of the time. Also remember that the calculation of ratios depends upon the input of data, and one poor input (a typing error on a keyboard for example) can make a huge difference to a formula’s result.