Stock selection is the systematic process of identifying and securing securities to include in an investment portfolio. Rather than simply accruing investments on a chance basis, the strategy of stock selection is a portfolio management technique that seeks to assemble securities that give the portfolio balance and thus protect the investor from shifts in various markets where the securities are traded. A well-planned stock selection also helps to ensure the consistent increase in the value of the portfolio as a whole, and help the investor make wise allocation choices when it comes to determining what blend of investments will provide the best possible returns.
In order to properly engage in stock selection, it is important for the investor to set goals for the portfolio. These goals can be a combination of long-term and short-term milestones. A long-term goal may be to build an investment portfolio that is capable of generating enough annual dividends to provide financial support after retirement. Short-term goals may include the generation of enough funds from securities transactions to go on vacation in the next six months. Clearly defined goals makes it possible to focus on investment opportunities that are more likely to help the investor achieve certain ends, and avoid getting side-tracked into spending time evaluating securities that are not likely to produce desirable results.
With goals firmly in place, the investor can begin to look at securities that will aid in establishing a financially sound foundation for the portfolio. This often includes deciding on the general type of investments that are included. An investor may choose to select stocks that are low-risk and tend to generate a small but steady return from year to year, and couple those investments with other stocks that are more volatile, but stand to produce a higher return in the short-term. Conservative investors may find that bond issues are also an excellent prospect for long-term stability, while futures make it possible to secure something now that will prove to be profitable at a later date.
There is no single ideal combination of holdings in an investment portfolio. Responsible stock selection is based on identifying what holdings will provide the most security for the investor while also moving him or her toward the goals set for the performance of the portfolio. Some investors will find that conservative investments with low risk are much better suited for their purposes, while others will find that adding in a few riskier holdings work very well with their plans.
For this reason, many investors rely on the expertise of a broker to develop a plan for stock selection, both in terms of purchasing specific securities at a given point in time, and selling off holdings when the time is just right to earn the best return. Working with a broker to establish and maintain an active portfolio does not mean the investor hands over the management of the assets to a broker, although this is sometimes the case. An investor can and should always be involved in what type of stock selection is taking place with the portfolio, and make sure the approaches that are utilized are in fact moving the investor toward his or her goals.