How To Pick Stocks in Australia To Invest In: Explained

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People want to know how to pick and choose good stocks in Australia.


Proper stock selection is essential when looking to build wealth, though there is no set stock selection formula, you may find different approaches that lead to an investor or share trader's success.


Individual factors such as experience level, risk tolerance, time, capital, and expected outcome are crucial when determining a stock-picking strategy.


This guide equips you with the best strategies to find potentially profitable stocks in your chosen market.


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1. What Are The 4 Steps In Picking A Stock?


So, how do you know which stock to choose? Here are the simple steps to learn stock selection:



Step 1: Evaluate The Market


Around 75% of stocks follow the direction of the broader market.


So, before you add a position, make sure you look at the market's momentum. Buying stocks when the market is trending higher could boost your chances of a successful trade.


Also, watch out for potentially market-moving events such as earnings announcements, Federal Reserve policy meetings, etc., as they could impact your trade.



Step 2: Identify Sectors That Look Promising


One way to do this is to track the performance of individual sectors to find which have excelled in recent months.


Sectors or industries with defensive characteristics, such as Health Care and Utilities, are good options.



Step 3: Narrow Down Your List


Different types of stocks are listed in the market. Some are dividend-paying stocks, while others are growth stocks that give you stock price appreciation over time.


The former is usually available at lower valuations (lower prices compared to current fundamentals), while the latter tends to have higher valuations that show the company's potential.


Once you identify the type of stock, the next step is to use the screener tool to filter the stocks in that category based on:


  • Analyst rating

  • Sector

  • Price performance

  • Price-to-book (P/B)

  • Price-to-earnings (P/E) ratios

  • Historical or expected growth rates




Step 4: Perform Fundamentals and Technical Analysis


Having shortlisted a handful of stocks that passes the above parameters, the next step is to check the stock's fundamentals, including:


  • Company's earnings

  • Financial statements

  • Ratings

  • Investment commentaries

  • Red flags, such as a lawsuit against the company or a product recall 

  • Positive indicators such as new product launch or the announcement of a takeover


Next, look at each stock's trend line to find the right time to enter the stock. Based on technical charts assessment, you can buy when the stock is into an uptrend or when at a dip if you believe the fall in stock price is an anomaly.


While you follow the above steps, carefully track your expectations and reasons behind each trade.



2. How Do You Choose Shares On The ASX?


Do you want to start investing but need more proper knowledge about the stock market?


Here are the steps to assist beginners in choosing stocks:



Step 1: Understand The Type Of Stocks Available


You can find different types of stocks in the market. The first step in your stock selection strategy is learning the four stock types:



Blue Chip Companies (The S&P/ASX 50)


These are Australia's top 50 well-established and stable companies, ideal for risk-averse investors looking for consistent returns.


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Capital Growth or Income


Some stocks offer a regular income in the form of dividends, and others provide capital growth. You need to decide which one aligns with your goals.


Companies that pay regular income are generally larger on the Australian Securities Exchange (ASX). Check their track record of paying high dividends before investing.


Growth-focused companies are smaller companies that are more likely to reinvest profits in the business instead of paying dividends to its investors. Checking their past and projected growth figures could be beneficial before you consider them.



Speculative Companies


These companies lack a long market history and aren't listed in Australia's top 100 companies. They suit experienced investors who can risk their capital, hoping for more significant returns.



Emerging Companies


You will find some companies on ASX that operates their business outside Australia. These are less protected than companies regulated by Australian law.


Investing in such companies may be ideal for investors who look for businesses that have yet to reach saturation and offer strong potential for growth and returns.


However, before investing, ensure you understand their business, location, regulation, language, currency, and distance issues.



Step 2: Understand The Market Sectors


The next step to learning how to pick stocks for dummies is to find the right market sector to invest in.


For this, you need to look at the pros and cons of each industry:



  • Banking and Finance: Companies in this sector usually offer consistent income through high dividends.


  • Energy and Resources: This is a highly cyclical sector that depends on the condition of the international economy. It comprises mining companies that usually don't give high dividends but has the potential to offer high capital growth.


  • Consumer: Companies in the Retail segment usually offer medium-sized dividends and fluctuate with the Australian economy.


  • Healthcare: This defensive segment can get steady returns in any market. As people will always require healthcare services, the sector can give consistent returns regardless of the stock market's overall direction.


  • Technology: This is the ever-booming sector yet to achieve great heights. You can expect tech stocks to give huge returns in the long term.


  • International: Overseas stocks listed on ASX expose you to larger markets outside Australia, thereby giving wider diversification. They are highly volatile and have the potential to provide higher returns.





Step 3: Determine Your Goals


Having gained some idea about stocks and sectors, the next step is to choose investments that align with your portfolio's goals – capital appreciation, regular income generation from their investment through dividends and distributions, or capital preservation.


Each of these goals requires a different strategy:


  • Investors who look for income generation should find stocks with good dividend yields. Their earnings and cash flow should support those dividends.

  • Investors interested in growth should find budding companies that show promising revenue growth.

  • If your goal is capital preservation, look for businesses that have been around for decades and yield stable and expectable profits.



Step 4: Find Companies You Understand



When you buy a company's stock, you become a partial owner.

During economic downturns, a lack of understanding of the business may lead to stock selling. Invest only in companies whose revenue streams, offerings, and competitive advantages you comprehend.

It's crucial to believe in the management and the company's long-term sustainability.



Step 5: Do Fundamental Analysis


Determine the company's intrinsic value based on qualitative factors, such as microeconomic and macroeconomic factors.


Carry out economic analysis (GDP, interest rates, and inflation rates), industry analysis (company's market share), and company analysis, including its financial health (debts, cash flows, earnings).



Step 6: Keep Your Eyes Open


Besides analysing the company and the stock trend, ensure you check the market news, financial news, and opinions of industry experts to stay up-to-date on the following:


  • The Australian economy

  • Government policy

  • Rates of interest

  • Public sentiment

  • Exchange rates

  • Industry-specific or regional influences

  • Relevant overseas economies and markets



Some authentic sources you should refer to include:


  • The Reserve Bank of Australia's Monetary Policy 

  • Finance and business sections of reputable magazines, newspapers, and websites 

  • Research banks and stockbroker's departments for predictions about economic conditions



Step 7: Follow Big Fund Houses Positions


Big investors only invest when they see strong potential in a stock. Figure out what reputed fund managers are bullish on.


Due to their expertise in stock picking, markets sometimes respond favourably when they take a "buy" position on a specific stock.



Step 8: Insider Trading


Insider trading activity is a reliable indicator of the stock's upcoming bullish or bearish sentiment.


It is because company insiders know more about a business's prospects than the general public and are legally obliged to disclose their trades.



3. How To Choose Stocks For Trading?


To gain insight into selecting stocks for day trading, follow the steps below:



Step 1: Develop a good understanding of the stock market


Step 2: Research stocks based on the outcome you are trying to achieve, the time and capital you can invest, and your attitude to risk.


Step 3: Perform fundamental analysis to estimate the intrinsic value of a stock. Use a mix of Qualitative and Quantitative stock analysis to build your portfolio. 



Qualitative Factors Include:


  • Company news

  • Financial events

  • Personnel changes



Quantitative Factors Include:


  • Earnings releases

  • Dividends

  • Balance sheets

  • Ratios



Step 4: Carry out technical stock analysis by looking at the patterns and trends that hint at future market movements. Technical strategies you can choose based on your trading style are:


  • Moving average 

  • Exponential moving average

  • Moving average convergence divergence

  • Bollinger bands

  • Relative strength index 

  • Ichimoku cloud 

  • Fibonacci retracement 

  • Stochastic Oscillator

  • Standard deviation

  • Average directional index 


You can determine whether the stock is overvalued or undervalued with fundamental and technical analysis.


Step 5: The next step in stock selection for trading is to have a trading plan that aligns with your investment goal. Your stock selection differs based on your chosen trading setup, such as Swing trading, Buy Today Sell Tomorrow, position trading, day trading, etc. 



Step 6: As stock investment carries general market and exchange rate risks, pick stocks that suit your risk management strategy. Diversify your portfolio to spread your risk.



Step 7: The stock price is another crucial concern when choosing a stock for trading. Work on the capital you are willing to risk per trade based on your trading strategy, the extent of market exposure, and the risk-reward ratio you have set for yourself.


Based on your investment capital, you can decide on the number of stocks you can buy.



Step 8: When considering overseas stocks, hedging opportunities can help against risks such as outdated business models, the arrival of new competitors, bad decisions by management, etc. 




4. How Many Stocks Should You Buy As A Beginner?


This question doesn't have a one-size-fits-all answer because the ideal number of stocks for a beginner to buy varies based on various personal factors, including:


  • The amount of money you have to invest

  • The commission you will have to pay for a stock. It is inversely proportional to the percentage of your investment. In other words, the more stocks you buy, the smaller the commission will be. 

  • The price of the stock

  • Your risk tolerance power. Do you know what the riskiest thing to invest in is? It is putting all your money into a single stock. That's where diversification across sectors is essential.  


Many beginner investors buy 10 to 15 stocks with fantastic growth potential to outperform the market.



5. How To Pick Stocks For Long-Term?


  • To predict what stocks will do well in the future, look for their value. Find stocks that are priced too low for their value. It indicates that they could gain over time.

  • Identify companies with long-term staying power, like dividend aristocrats. 

  • Thirdly, look at the company's profit margins and long-term earnings. 

  • Ensure that the company has made good choices in the past, is adaptable to market changes, and survived economic downturns.

  • Make sure the prospects of the industries in which your chosen companies operate are progressing and staying strong. 

  • Lastly, look at the quality of the company's management and its record of investment returns and leadership value. Go with a company with a management team capable of making solid strategic decisions to influence its future direction toward profitability. 


A company that meets the above criteria will likely be around for longer.



6. How To Pick Good Stocks For Short-Term?


If you want to invest in stocks for the short term, it's a good idea to look at their charts and trends.


This helps you see how the stock has done in the past, how it's been doing recently, and what might happen shortly.


With this information, you can find stocks that seem to be doing well and could go up soon. It's not a 100% safe way to predict exactly what will happen, but it gives you a sense of how a stock might perform in the short term.




7. Which Stock Has The Lowest Risk?


To find the lowest-risk stock, you need to check the stock's Beta. It indicates the volatility of the stock against the volatility of the S&P 500.


Usually, stocks with a beta above "1" are highly risky. Such stocks are growth stocks that have outperformed the S&P 500 and could offer higher returns quickly.


If you intend to buy a low-risk stock, make sure its Beta is less than and close to 1. Such stocks are more stable and have given returns in line with S&P 500 performance. 


Don't go for stocks with very low beta, as such stocks have underperformed the S&P 500. Even though your chances of losing money due to market volatility are less, their lower profit potential doesn't make them worth adding to your portfolio.


Remember, buying stocks is always risky, and there is no such thing as risk-free stocks. All stocks that you may buy come with risk. One can always lose all capital invested, so consult an independent financial advisor before making investment decisions.


The above serves only as educational guidance that guarantees no return or safety for your investments.



8. Which Stock Will Grow In the Future?


Almost every investor wants to know which stock is most profitable in the market.


To find such stocks, you must research companies to learn about their business, operating sector, and management's track record.


Learning the company's basics help you get an idea of whether the business has staying power and can offer returns. For example, a company that manufactures products and services that most people buy is likely to be in demand in the long run.


Furthermore, consider different aspects of the company's governance and prefer companies that focus on environmental safety, worker protection, and other social welfare activities.



9. What Are The Safest Stocks?


The concept of a "safe" stock is often associated with its ability to retain its value even during challenging market conditions. However, given the inherent volatility of the share market, identifying an entirely "safe" investment is not feasible.


During periods of inflation or economic crises, adjusting your ASX portfolio to mitigate potential losses strategically is advisable.

Investing in exchange-traded funds (ETFs) could be a more secure option for beginners or those uncomfortable with a fluctuating portfolio value.


ETFs offer diversified exposure, making them a safer bet. Nonetheless, it's essential to remain mindful of the inherent risks and seek professional advice to make informed investment decisions.


Alternatively, look for stocks of companies that are highly resilient toward inflation. These include:


  • Companies with adequate pricing power to increase their revenues in line with the inflation rate

  • Companies that dominate their markets

  • Companies should have real and tangible assets to support their cash flow.


Remember, buying stocks is always risky, and there is no such thing as risk-free stocks. All stocks that you may buy come with risk. One can always lose all capital invested, so consult an independent financial advisor before making investment decisions.




10. What Are Some Popular ASX- Blue-Chip Stocks?


Below are five famous blue-chip shares listed on the ASX:


  • Commonwealth Bank of Australia (ASX: CBA)

  • Westpac Banking Corp (ASX: WBC)

  • BHP Billiton Limited (ASX: BHP)

  • CSL Limited (ASX: CSL) 

  • Wesfarmers Ltd (ASX: WES)



10 .Frequently Asked Questions (FAQs)



How Do You Know What Stock To Pick?


Selecting shares can be a nerve-racking experience. There are several factors that you need to take into account, such as:



Below are the critical questions that investors should consider when picking shares:



What Are The Growing Sectors in The Current Economy?


According to the Australian budget, financial support is allocated to defense, low-emission technology, cyber security, rail and road infrastructure, commodities, the travel sector, and agriculture.


This indicates potential growth in the sectors in the coming years. Besides these, banking, tech, and natural resource stocks are also popular Australian investments.



Pick a Company With a Growing Market Share


Having identified a growth sector, think of companies in those sectors that dominate or have a growing market share.



Is The Company Growing Its Earnings Over 3-to-5 Years?


“Earnings growth” is another parameter to screen stocks for investment.


A good-earnings company indicates a profitable and healthy business and a rising share price. Assess potential stocks to find whether or not the company’s financials are progressing in the direct direction.



Is the Company Generating Cash?


Cash is significant for any business as it helps them to survive and expand. A company with positive cash flow indicates it has spare money after paying its expenses.


It is a positive sign, enabling the business to invest in new opportunities and return capital to investors via share buybacks and dividends.


You can find this information through the company's annual report or website. It forms the basis of your fundamental research.




How Much Debt Does The Company Have?


Debt financing enables businesses to leverage money into more significant sums, enabling fast growth — however, companies carrying debt need to produce cash to service that debt.


Too much debt can be risky for businesses with inconsistent cash flows. It has less ability to bear a downturn than a company with less debt.



What Is The Share’s P/E Ratio?


The stock’s price-to-earnings (P/E) ratio reveals the price the investor is ready to pay for a specific company’s earnings.


It is helpful to compare different companies within the same industry. Growth companies usually trade with high P/E ratios, as investors expect to raise their earnings in the future.



What is The Track Record of The Management?


The quality of management is also an essential consideration for the investor, as the administration has a solid ability to impact future direction and profitability.


An investor should examine management’s record of returns as one of the ways to decide whether or not to invest in the stock.



Does The Company Have Industry Headwinds or Tailwinds?


Consider the industries' future prospects if you plan for a long-term investment. Companies operating in expanding industries will likely experience growth-related tailwinds that boost their earnings over the long term.


Where headwinds provide barriers that companies must overcome on the path to profitability, while internal tailwinds benefit them, such assessments help you evaluate future performance prospects.


To sum up, there is no single winning strategy to screen "good stocks" as the most essential consideration is your circumstances. You should still do your homework.


Whether your goal is long-term dividend income or short-term capital gains, you must know whether a stock performs well, makes a profit, pays dividends, or goes backward.


Combining technical analysis and fundamental research gives investors a higher possibility of choosing an outperforming stock.




What Are Five Tips for Beginner Investors?


If you are new to investing, make sure you read the below tips before investing:



Tip 1: Understand Your Investment Objectives


Having clear investment goals is essential for a successful investment.


The questions below will help you clarify how you should progress in your investment journey:


  • Why are you investing?

  • What is your risk tolerance?

  • What is your investment priority? 

  • How Much Time Do You Want to Spend on your Investments?



 Tip 2: Always Analyse The Stock Before Investing


Your investment value depends on the health of the business you invest in. Both technical and fundamental analysis are required to find the best stocks for investment.


Where fundamental analysis helps estimate a stock’s intrinsic value, technical analysis may indicate future market movements based on the stock's patterns and trends.


The analysis lets investors measure the stock’s supply and demand and determine whether it is overvalued or undervalued.


Besides analysis, the following can help you research a company:


  • Annual reports

  • Prospectuses

  • Research reports

  • Financial statements


Browsing company websites and corporate presentations can also help you refine your search.




Tip 3: Create a Trading Plan


Draft an elaborate trading and risk management strategy that is specific, achievable, time-bound, relevant, and measurable.


Popular trading styles include position, swing, day, and scalping. Consider customising the strategy based on your investment period, personality, risk tolerance, and financial goals.



Tip 4: Understand The Market


Besides stock analysis, getting a sound understanding of the general state of the economy, industry trends, investor sentiment, and interest rates are also significant.


Stay updated with economic and market changes, daily news, events, and trends that drive the economy and may impact a company's earnings.


Some of the topics worth studying before investing are:


  • The Australian economy

  • Government policy

  • Interest rates

  • Investor sentiment

  • Exchange rates

  • Relevant overseas economies and markets

  • Industry-specific or regional influences



Tip 5: Create a Solid Risk-Management Plan


Ensure the stocks you choose fit your risk management strategy.


Some risks you may consider while selecting stocks could be better management decisions, new competitors, outdated business models, general market risk, and exchange rate risk for overseas stores.


Another thing you can do to protect your portfolio is to diversify it across different industry sectors. This way, you can take advantage of the strengths of each company and enhance protection if one industry fails to perform.


In addition to the above, here are some of the best investing lessons you can learn:


  • Ensure you are financially ready to invest

  • Pay off your debt and create an emergency fund before investing

  • Be prepared for ups and downs in the stock market 

  • Look at market corrections and crashes as buying opportunities

  • Only invest in businesses you understand

  • Don’t follow the crowd

  • Long-term investing is the way to make a profit in the stock market

  • Lastly, remember that “Learning about investing” is a lifelong process




How Much Should a Beginner Put in The Stocks?


Due to short-term uncertainty in the stock market, you should refrain from investing the money you may require in the next five years.


Note that the funds you invest in the market need time to yield returns, whether through capital gains or dividends.


So, if you require money to repay your mortgage or pay for tuition fees, a home deposit, or a wedding, it is not the money to put into the stock market.


Once your base needs are covered, consider investing the surplus money. The stock market can be one of the areas to allocate your investment capital. Other investment options are propertybonds, forex, gold, silver, oil & gas etc.


When considering a stock investment, new investors should play it safe by sticking with the established performers, called ‘blue chip’ companies listed on the S&P/ASX 50.



Is It Worth Buying a Single Stock?


Pros for keeping a single stock in your portfolio:



Cons for keeping a single stock in your portfolio:



Beginner investors with less capital can instead opt for fractional shares that allow you to get exposure to various companies and sectors that you couldn’t if you bought only one stock.




Should You Buy Stocks When They Are Low?


It is not always a good idea to purchase stocks trading low. "Buying in dips" works only in low stocks worth pouncing on; otherwise, it can backfire, and you may lose your money.


You need to discover why a company’s stock trades at a low price. It could be because its value is downgraded, lacks potential growth, and receives lousy press that reduces its value for a specific period.


Ensure the company has a strong performance, and downgrading doesn’t reflect a new reality for the company you wish to invest in.



What Are The Hopeful Stock Themes?


There is no assurance that certain stocks will boom in the next 12 months.


However, your stock selection should be based on the big themes that are presently driving the market in.


As Inflation and central banks lift interest rates, the fears of a recession are looming. It makes sense to hold defensive stocks to reduce volatility in your portfolio. Stocks in pharmaceuticals, defence, tobacco, etc., are worth considering.





How Long Should You Own A Stock?


The stock market is a long-term game. You should only invest the funds you won't require for the long term.


In the short term, the market is susceptible to high volatilities that may cause your portfolio value to drop by even 20%. However, in the long run, the share market has delivered total returns of about 10% annually. (Past performance does not guarantee future results.)


So, if you plan to invest in stocks, stick to stable companies for at least five years.



11. Conclusion


Buying the right shares can help you grow your wealth. Like any investment, consider the risks involved before investing.


Define clear financial goals and strategy, diversify across different sectors, and adjust your portfolio according to the economic and market situation to get the best outcome.


If you don't have a share trading account yet, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.


(eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. Other fees apply. See PDS and TMD)




The advice and information on is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.

Please note that the information presented on is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.


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