So you’ve decided to invest in stocks and have mastered the fundamentals of investing. The big question now is how do you choose the stocks to invest in?
Figuring out which stock to invest in can be challenging, especially if it’s your first time. With tens of thousands of stocks in the market, narrowing down to a few stocks can be overwhelming. However, with the right tools and information, you can confidently pick stocks. Remember that when you buy a stock, you become a part owner of that company hence the value of your stock will largely depend on the health of the business.
Consider Your Investment Goals
Different people have different investment goals. Some are looking for an income stream while others want to build wealth for a long-term purpose such as retirement or a child’s college fund. Some want to make big gains while others just want to preserve money. Basically, there are two investment strategies – growth and income. Income investors prefer low-priced stocks with a stable growth rate and dividends. Growth investors, on the other hand, buy high-priced stocks with high growth rates and potential. Therefore, choose a stock depending on the purpose of investing. If you’re an income investor, choose dividend stocks as they provide an immediate return on investment and some measure of protection in market downturns.
Invest in Business You Understand
It’s always good to start with an industry or company that you’re familiar with. This will make it easier for you to choose the stock to buy based on the information you already know about the industry. If you know a company’s products or even use them, then you probably have an understanding of how the company works. Companies in the industries where you work are also a good choice. On the other hand, avoid investing in companies you don’t understand.
Consider Price and Valuation
Investment experts often look for stocks that are cheap or undervalued. Underpriced stocks are stocks that are selling at a price significantly less than its intrinsic value, and you can use the Benjamin Graham Formula to find such stocks. Investing in underpriced stocks is a great strategy, especially if you identify the stocks that are moving in the right direction. As you will see in The Intelligent Investor review, Graham argues that investing in such stocks has little downside risk but great potential for upside. However, you must be careful because sometimes a stock is cheap because the business is slowing down. Also, do not be deceived by stock market gyrations; instead, look at the long-term trends of stocks.
Evaluate Financial Health
All public companies release quarterly and annual financial reports. Find the official reports on their websites or the SEC. Look for revenue growth, check the company’s debt, and look at the companies’ profit margin. Stock prices increase when companies are growing and making more money. Compare a company to its competitors to see their profits and size of debts. If a company is paying a dividend, check the history of their payments. Are they increasing or decreasing?
It’s very important to diversify your portfolio. Though you want to invest in industries you understand, it’s important to ensure you don’t overload your portfolio with stocks in the same sector. For instance, if you work in IT, don’t overload your portfolio with tech stocks. Industries are subject to ups and downs in the market hence it’s not advisable to invest in one industry.
What are your tips for choosing stocks? Share with us in the comments below!
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