Stock picking can be both a science and an art and it’s not as easy as it seems. Anyone can pick a name out of a hat, but to be a true UK Index magician and find gold nuggets on the stock market takes skill, experience and hard work. Here’s where the competitive edge lies.

Many of my clients are experienced investors, but even they sometimes need help and support to manage their financial portfolio. I don’t give “hot tips” or unsolicited advice, that’s not how we work here at Accendo Markets, but I often can help my clients make sense of the market complexity.

For example, many of them are often bullish on a particular sector, but can’t decide which particular company in that sector offers the best tradable opportunity. Some feel that Energy is the hot commodity these days when oil prices are pushing record highs, or that Banks are a good investment because of their reliability and stable earnings, or that Miners are a great investment.

But which Bank to pick? Which Mining stock? Which Housebuilder? Do you do for the big, recognisable household name, or try to find a proverbial “diamond in the rough”? After all, big doesn’t necessarily mean good and there are plenty of mid-tier shares that offer amazing tradable opportunities, both Long and Short.

Here are a few simple rules of thumb I use to help my clients get a sense of the market and make an informed investment decision.

Liquidity. No matter what you chose, you rarely want to be stuck with an asset that you can’t get rid of in a pinch or that you can’t buy when the price hits your desired level because there are no sellers. A sensible investor should always consider liquid assets first and foremost. One way to determine liquidity is to look at Average Traded Volume over a reasonable time period. A common benchmark can be to look at a 20-day period and around 2-3m average traded volume.

Volatility. The end goal of investment is to make money, so a prudent investor wants to look at stocks that offer regular big moves. Not only that, but volatility should also be controlled, predictable, tied to specific events and conditions. Here’s where a knowledgeable broker is invaluable. Want to know how much a share price moved last time the company reported, or went ex-dividend? No problem. Want to know which events (corporate, macroeconomic, political) produced the biggest market moves in specific stocks? We do that kind of research every single day.

Here’s a tangible example. Last 3 times Royal Dutch Shell reported quarterly results, shares moved -98.5p (26 Jul, Q2 results), -19p (26 Apr, Q1 results), -63.5p (1 Feb, Q4 results) through the session. Compare that to a company like Tullow Oil: +6.7p (25 Jul, H1 results), -6.6p (28 Jun, trading update) and +2.5p (7 Feb, FY results). Different companies, different results, you might say. That’s true. But in the end, what you care about is how much the stock moved, right? And this is something your broker can research on your behalf.

Risk vs. reward. Every investor has their own risk appetite, but risk has to make sense. Shares go up and down all the time and you can lose money, but investors need to consider stocks where the potential gain justifies potential losses. Ideally, investors are often looking at a risk/reward ratio of 2.0-3.0. To find these kinds of tradable opportunities, you need to carefully study stock charts and find support and resistance levels that can signal potential maximum profit or loss.

Here’s a chart for Morrison Supermarkets over the last several years. Shares have been in an uptrend in 2018, so will they go all the way to 2013 highs around 300p or fall back to Summer 2018 lows around 242p? If both futures are equally likely, the risk/reward of those two options works out to 1.4 multiple. Is that sufficient benefit to justify the risk for your portfolio?

Do you have an opinion of how these stocks will move? If you know an interesting opportunity that looks exciting to you, but you need an extra edge of professional stock market research to make your investing more refined, get in touch with me and we can discuss these and other tradable opportunities in more detail.

Sam Springett, Senior Trader at Accendo Markets, 24 August 2018