One of the most searched for phrases on Google is how do I invest in Stocks. In this article I am going to discuss the process I go through to find speculative stocks that I can potentially invest in. Now please understand there are thousands of ways that you can find speculative stocks and I am not saying that the process I go through is better than anyone else’s. Rather this is the process that works best for me and for my investment strategy. This process works well for investors who take a longer view or timeframe for holding stocks and definitely would not be suited to a day trader, as an example.
The first thing I would say is social media is not a tool to rely on to find speculative stocks to invest in. Sure you may stumble across a conversation between people discussing how they invest in Stocks. They may be discussing a particular stock and there is nothing wrong with researching and looking into that particular stock. Obviously every stock, regardless of where you come across it needs to be put through your investment strategy. The issue I have with investing in stocks that people are discussing on social media is there is a very high chance that you are not one of the investors who found this stock before the masses. The key to success in investing in stocks is finding them before other people do. The reason for this is you will have the opportunity to accumulate it if there is little liquidity.
How Do I Invest In Stocks?
The way I find speculative stocks to invest in really has no reliance on any person or any platform. If you were to ask me how do I invest in stocks, I would say it’s through a particular process. At a high level I go through the following steps.
- Create a spreadsheet with a column that represents each of the factors that I consider in my investment strategy. To understand more about these factors please read my other article that focus on this called “Investment Strategy – Key Terms”.
2. Open the following site which provides a list of every company listed on the ASX. If you trade other exchanges simply use the relevant exchange site. https://www.asx.com.au/asx/research/listedCompanies.do
3. Now this next step depends on your experience level:
A. Inexperienced: If you are in this category I hope you are sitting down when you read this. You will need to work out the market capitalisation for every company in the list. There are roughly 2,000 on any given day. The reason I suggest you do this manually is you need to experience working out the MC for many different types of companies that have different share structures. You only need to do this exercise once before you can progress to the easier automated way outlined below. In your investment strategy you should have a maximum MC you are willing to invest in. Simply filter your results to include every company up to the MC you are comfortable with.
B. Experienced: Simply run a scan, there are plenty online however if you have never used one perhaps you can start with trading view as its pretty simple to use. All you need to do is run a scan to provide every company under a specific MC.
4. At this stage you will have a list of companies that most likely number in the hundreds. What you then need to do is run your investment strategy through every single company to continue to narrow down the list. If I look at my own strategy I look for companies that have at least 6 quarters of cash in the bank. When I apply this filter it automatically removes roughly 70% of companies from the list. So as you can see as you analyse these stock with your investment strategy the list will continue to reduce in potential investments. By the time you complete this exercise you will have a shortlist of I would say probably 20-30 companies that you can take to the next stage. If the number is still quite large then I would say your investment strategy isn’t focussed enough. You don’t need hundreds of factors but I would say somewhere between 5 -10 is acceptable.
5. Now it’s time to dig much deeper into the company.
A. Look in the past quarterlies and annual reports and see what commitments/goals management have set. Have they achieved these? If not why? If there is no valid reason then why would you trust them with any future goals?
B. Does the company have any upcoming milestones? If not what are going to be catalysts for share price appreciation?
C. If cash levels is not a factor that you consider in your investment strategy then definitely need to check this here. Total cash and debt can be found in the latest quarterly cash flow report. From a risk perspective, a company with a market cap of say $10m but has no cash is completely different to a company with $10m market cap but has $5m cash. This is a very important factor as if the company cannot fund its own operations this means they have to conduct a capital raise by issuing more shares to “sophisticated investors”.
This in and of itself is not an issue, however you want to ensure that you are accumulating shares as close to the capital raise price as possible. This will be impossible to know though months in advance so if you are investing in a company that has low cash levels then you can be sure that the cap raise price will be at a discounted price to the market. Then all of a sudden you have a number of sophisticated investors who have obtained shares cheaper than you and are willing to flip it around the price you invested in. This means future share price appreciation is much more difficult for you.
D. If debt is not a factor that you consider in your investment strategy then definitely need to check this here. In my 10 years of investing I can’t recall one micro-cap company that had significant debt and went on to become successful. The landscape is hard enough for micro-cap companies as it is to then add on debt which means future capital raises are required, future revenue and profits will be eaten up etc
E. Google the company and the directors. There may be information in the public arena that isn’t mentioned in an ASX announcement. As an example directors may have previous company dealings which ended badly due to a decision of your companies director.
F. Call management to discuss the company and their vision. Now you are not looking for any inside information here, rather you want to have what kind of person the director is and to determine why they are passionate about achieving the companies goals. If the director as an example, doesn’t return your call or only wants to spend 5 minutes talking to you then this is a bad sign. Understand that the directors are managing your hard earned money so get to know them and if you aren’t comfortable with how the conversation went then don’t invest.
Please remember that none of the above will make sense if you do not have a written investment/trading plan. You can’t possibly analyse a company if you don’t have a plan to analyse against. I have provided an example of my own investment strategy to get you started.
Another point to keep in mind, which I will explore more in later posts, is you don’t need to rush in and take your stake in a company the moment you find and analyse it. If for example you want to invest a total of $10k into a company then perhaps buy a partial stake to start off with and monitor how management perform and whether goals start to be achieved. The more comfortable you get the more shares you can purchase over time. If you become less confident over time then you can exit more easily if the liquidity is low as you will own less shares.
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