Have you finally decided to invest in stocks? You have two options. You could go the hands-on route and choose to do your research by picking stocks you believe would suit your portfolio. Or you could pick the Robo-advisor route, where a low-cost financial service will offer stock-picking advice to you based on careful calculation. If you choose the first route, with the tens of thousands of companies now listing their shares on the market, where should you start? How to choose the right stock? Keep reading to find out.
How to pick the right stock
Those with a knack for growing their wealth pick stocks with these three things in common.
- They first decide the goals they want their portfolio to achieve and ensure they will stick to these goals.
- They stay on top of trends, the daily news, and other events that impact the economy and the companies within it.
- They use knowledge and goals to make informed choices when it comes to buying or selling stocks.
The following steps to choose the right stock can guide you toward investing in the stock market for the first time.
Clarify what your goals are
The foremost step to picking suitable investments is to clarify what your investment goals are. Making money is a vague goal. Be specific about what you want to use the funds for and why. Goals like supplementing your income, generating savings for retirement, or preserving your wealth can come in handy. These goals become ways of determining the amount you wish to earn through your investments and the time frame you want to acquire this amount. Accordingly, you can aim to invest in stocks that are predicted to grow at a rate suited to your goals.
Determine your investing style
Besides any financial goals, knowing your investing style becomes crucial for creating a portfolio of stocks for yourself. We can break down investors into three types. Investors can be income-oriented, wealth-preserving, or capital appreciation-oriented. The first kind — income-oriented investors — focuses mainly on buying and holding stocks in companies that pay a good dividend regularly. The companies selected tend to be trustworthy low growth companies in sectors like utilities and IT. Other sectors worth investing in include bonds, real estate investment trusts, master limited partnerships.
Those investors aiming to preserve their wealth have a lower risk tolerance, either by nature or circumstantially. These investors prefer investing in stable blue-chip companies and might choose to zero in on consumer staples. Such companies tend to do well in both good and bad economic conditions. Wealth preservation investors aren’t the type who will change IPOs (initial public offerings). Finally, investors seeking capital appreciation look to invest in stocks that perform the best in their early growth years. For this, capital appreciation investors tend to take on higher risk for the opportunity of making more significant gains.
Aim for diversity in your portfolio
Picking the right stocks matters when it comes to maintaining the composition of one’s financial portfolio as well. Ensuring you have a balanced portfolio targeted towards your financial goals is vital. This means creating diversity in your portfolio so you can reduce your exposure and risk. Even if you are an aggressive investor, keeping a few blue-chip stocks to offset other volatile stock losses is recommended.
Keep your eyes open
Keeping up with the market news and investors’ opinions is essential if you want to learn how to choose the right stocks in varying market conditions. Carry out passive research by keeping up with industry blogs by writers whose views align with yours or interest you. An investment thesis can be based on a news article or a blog post. For example, one news blog might state how nations’ emerging markets create new middle classes made of individuals who demand consumer goods. Accordingly, you can deduce that you can expect a surge in demand for specific products or commodities whose stock prices will grow.
Knowing how to find the right companies to pick is also crucial in the stock-picking process. Employ the aid of a screener so you can filter a group of stocks based on specific criteria, such as industry and sector. Screeners offer their users additional features like the ability to sort companies based on the market capital, dividend yield, and other valuable investment metrics. You could also look for exchange-traded funds, track an industry’s performance that interests you, and see the stocks they’re investing in. The ETF’s official page will disclose its top holdings. Finally, you can also search financial news releases, stock analysis articles, and the blogosphere for commentary on companies in the industry or sector you’ve targeted.
Knowing when to say no
Knowing how to pick the right stocks is also about restraint. At the end of our intensive research process, you could be left with a single investment protective, or you might have a list of more than ten prospective companies that are worth investing in. You will likely falter at the beginning. You might find that the industry you are looking at wasn’t suitable for you or an approach you believed was suited to your needs was too aggressive for you. Knowing when to say no and change your strategy is also an integral part of learning how to choose the right stocks.
The Bottom line
Learning how to choose the right stocks is an art form that has several stages. The initial stages of preparation involve learning your investment style, risk appetite, and financial goals. The next step consists of preserving diversity in your portfolio while conducting research based on your preferences. Finally, choosing stocks is not an easy process and is subject to many adjustments. Be prepared to completely change your approach and more before you can discover stocks best suited to you.