Carefully choose stocks in competitive companies that anticipate change.

There are literally thousands of companies whose stocks are traded on the market. To separate the winners from the losers, investors need to know how to ask the right questions.

When looking at a stock, it’s best to act like a five-year-old and never stop asking questions such as: Why do people like or need the company in their lives? Why do they consume its products? Is the company selling a revolutionary innovation or is it a trendy start-up that’s going to fade away?

You should also ask: Why is now the right time to buy? After all, major corporations like Nike, Exxon and Microsoft have existed for decades, so why should you invest in them today? Well, maybe they just tapped into a new and promising market or have nailed down a profitable long-term trend.

Another strategy is to seek out companies with a genuine competitive advantage, that is, one or more attributes that help them outperform competitors. One such attribute is pricing power, a company’s ability to easily raise prices while retaining its customers.

Just look at Apple. When the company launches a new iPhone, they barely even consider the prices of their competitors. Instead, they set their own prices with the knowledge that consumers desire Apple products and will pay a hefty price to get them.

Finally, you should steer clear of companies that can’t anticipate change. In fact, there are plenty of ways to sniff out a company’s danger of incurring heavy losses in the near future due to this flaw. Two such indicators are cheap competition and the rise and fall of technology. Take Kodak, which fell out of fashion with the rise of digital photography, causing the demand for film cameras to plummet.

Then again, some companies can better adapt to changing trends. For example, Coca-Cola is no longer just a soft drink company but has expanded its product line to include other drinks that meet the ever-changing needs of consumers.