10 Things to Consider Before Trusting a Stock Picking Service

Day Trade Review  |

In today’s economy, investing is no longer an option; it’s an essential component of every well-rounded financial plan. If you’re leaving your cash in a savings account, you’re losing money due to inflation. Most people know they need to invest, but only a fraction of Americans actually invest in the stock market. If you're on equities.com, you're clearly ahead of the curve.

The market is confusing to many new investors. Many aspiring investors want to do more with their capital but don’t know where to start. That’s where stock picking services come in.

Even if you're an experienced investor, recent market volatility may lead you to seek further advice.

There are a variety of different stock picking services out there. Companies like Motley Fool, GuruFocus, and Investors Business Daily lead the way.

Stock picking services do in-depth market research and deliver stock picks to their subscribers. These services can be valuable to new investors, but it’s important to choose the right service or you could pay the price. As part of my job at Day Trade Review, I do in-depth analyses of these companies to make sure they deliver on their promises. It can be difficult to look past bold marketing claims and get to the truth, so here's a cheat sheet for you to get started.

Here are 10 things you should consider before signing up for any stock picking service.

1. Credibility

It should come as no surprise that you need to be selective with who you take financial advice from. You wouldn’t take recommendations from a stranger on the street and you shouldn’t take recommendations from an unreliable online company. Here are some questions to consider before choosing a stock picking service:

  • How long has the company been around?
  • Who runs the company?
  • How transparent is the company?

2. Track Record

You’ll also want to analyze a company’s track record. Technically, this should go hand-in-hand with credibility, but that’s not always the case. A credible company can have a poor track record. Just take a look at trusted mutual funds. Many of these funds are managed by credible companies but still underperform the market.

Look for a company’s track record and performance and see how this performance compares to broader market performance. Here are some other things to consider:

  • Does the companies performance fluctuate drastically by year?
  • Does the track record seem legitimate?
  • How does the company’s track record compare to other services and/or broader market returns?
  • Does the company break down the details of their performance?

As noted in our recent Motley Fool review, it’s important that a company reports on both their winners and losers. Be cautious of padded track records or companies who have a few big winners to cover up their overwhelmingly high amount of losers.

3. Cost

Investment advice always comes at a cost. There’s nothing wrong with that. Just make sure your aware of the costs before signing up, as these costs may affect your overall profitability. For example, a stock picking service may be a great deal at $99/year but unprofitable for you at $999/year.

You should also remember that “cost” doesn’t always equate to “value.” A cheap service that offers poor investment advice will cost more than a more expensive service that offers great advice.

4. Investment Goals

There’s no universal investing strategy that works well for every investor. Even the fund managers on Wall Street utilize different strategies. While you may not have time to comprise an in-depth investment strategy, you can think about your own personal investment goals. These goals will help dictate whether or not the stock picking service is a good match for you.

The next three points will delve deeper into this concept.

5. Investment Strategy

As mentioned above, there are plenty of different investment strategies. You need to find one that works well for you. Try to find a stock picking service that aligns with your investment strategy. For example, if you’re interested in emerging technology companies, you want to find a stock picking service that specializes in this area. If you rely on charts to make decisions, you want to find a stock picking service that focuses on technical analysis.

6. Risk Appetite

Risk management is key for any investing strategy. Obviously, we’d all like to eliminate risk, but that’s nearly impossible. No investment strategy is foolproof, and there will be risk associated with any investment. That said, different investments carry different levels of risk. For example, a money market fund has relatively low risk, but also delivers lower returns. Investing in individual stocks carries higher risk, but can yield higher returns.

Focus on your own personal risk appetite. If you’re younger, you may be able to take on more risk, whereas if you’ve recently retired, you’ll want to lower your risk.

7. Alternative Investments

Stock picking services are designed to uncover hidden gems in the stock market. These services operate on the premise that their individual stock picks will provide higher returns than self-directed investments. Make sure to analyze the alternatives before committing to a service.

It’s relatively easy to invest in index funds, ETF’s and mutual funds. At the very least, you’ll want to make sure your stock picking service can outperform the S&P 500. Otherwise, you’re better off sticking with a simple investment strategy.

8. Expectations

It’s important to have realistic expectations before joining a stock picking service. These companies can be aggressive with their marketing, so try to stay clear-headed. Don’t expect to double your money in a year; it will make you reckless. Set realistic expectations and see if the stock picking service delivers.

9. User-Friendliness

Once you’ve narrowed down your selection to a few stock picking services, try to learn more about how the services are run. How do they share their stock picks? Do they send in-depth reports, entries/exits, etc.? Are you able to follow their research and make intelligent investment decisions?

You can always contact customer service teams if you need more information.

10. Reviews

Last but not least, read reviews about the stock picking services you’re considering. Other investors have been where you are right now. The experience of others may help you save a lot of money in the long run. Read reviews and see what people like and dislike about different services. Check third-party sites like TrustPilot and other reputable review sources. Reputable sites (such as equities.com) will have great reviews and testimonials.

Ready to Get Started?

Start researching some of the different services out there. Many services will offer a monthly subscription so you can get a feel for the service before committing to the year. Test out some different services and see which ones work best for you.

Stock price data is provided by IEX Cloud on a 15-minute delayed basis. Chart price data is provided by TradingView on a 15-minute delayed basis.

DISCLOSURE: I have no positions in any companies mentioned.

The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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