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How To Pick A Stock

Part 2: Making Decisions

Turning a good company into a good decision: how expectations move prices, how to read an earnings report, how big to size a position, how your own psychology costs you money and when to sell, plus a worked example, a thesis template and a one-page scorecard you can reuse on any ticker.

What you will learn

• Expectations versus reality: why a good company can be a bad trade
• How to read an earnings report: the five things to check first
• Position sizing with real math
• Investor psychology: where most beginners actually lose money
• When to sell: a broken thesis is different from a price drop
• A case study of one fictional company, start to finish
• The trade journal and thesis template
• The one-page scorecard
• Diversification and correlation, and where to find the data

Key terms in this lesson

• Earnings reportA company's quarterly results, usually with a call where management discusses them.
• GuidanceManagement's forecast for future revenue and earnings.
• EPS (Earnings per share)A company's profit divided by its number of shares.
• Forward P/EA P/E ratio that uses expected future earnings instead of past earnings.
• Position sizingDeciding how much money to put into a single trade.
• Stop lossA pre-set exit point that limits how much you lose on a position.
• FOMO (fear of missing out)The urge to jump into a trade because it has already moved a lot.
• Confirmation biasFavoring information that supports what you already believe.
• AnchoringFixating on a particular price, such as what you paid, and judging everything against it.
• Revenge tradingTrading to win back a loss immediately, often with bigger size and weaker setups.
• OvertradingTrading too often or in too large a size.
• Trading planA written set of rules for what you trade, when you enter and exit and how much you risk.
• Trade journalingRecording your trades and the reasons behind them so you can review your process.
• DiversificationSpreading money across different assets so no single holding can sink the portfolio.
• CorrelationA measure of how closely two assets move together, from -1 to +1.
• Market capitalizationThe total market value of a company's shares: share price times shares outstanding.

Try it in PDB