• By Check-a-Salary
  • Posted Thursday 30 th June 2022

How to Choose a Stock: Best Practices for New Investors

When you make the decision to see for yourself what stock picking is all about, your main target should be to find a business that has solid fundamentals and comes with a good stock value – especially if you intend to keep holding onto an asset for longer. However, before you decide to trust a particular company and buy their stocks, you should perform a thorough research to learn more about their business operations and determine whether they truly deserve your investment.

With thousands upon thousands of different stocks to choose from, it all might seem quite overwhelming at first. Luckily, this article will guide you through the basics and best practices that every inexperienced investor can follow in order to make better decisions. The advice below ranges from determining your goals first to finding companies you truly understand, and buying stocks with a margin of safety, among other things.

Here’s what you should know before investing your hard-earned cash into a publicly traded company.

Determine Your Goals

Your first step when trying to pick the right investments should be determining the purpose of your portfolio. Keep in mind that while everyone invests with the purpose of making money, some investors might be focused on preserving their wealth, while others may be looking for ways to generate an income once they retire. On top of that, there are also people who invest in order to generate a steady stream of regular income.

Therefore, before you sit down to read reviews of different stock picking systems, be it Gorilla Trades or any other site, you should take some time to think about what are your particular goals with your investment portfolio. The portfolio serves as your basket of assets that can hold stocks, bonds, and cash. Keeping it diversified can be a good idea, but it often comes at a significant risk, so you need to know whether you’re ready for an adrenaline rush or prefer to keep things simple.

Your goals will also determine which companies  you’ll look to buy. For instance, investors who are mostly interested in making an income should be searching for solid dividend yields (a ratio that tells you the percentage of a company's share price it pays out in dividends each year), but shouldn’t forget about the cash flow and earnings to support those dividends.

Moreover, investors who prefer the approach of growth investing will rather focus on new and young companies that show promising results and potential for revenue growth, but may not be as stable as more established companies. Last but not least, people interested in capital preservation are most likely to invest in solid businesses that have been around for decades and continue to produce steady and easy to predict profits. So, which kind of investor are you?

Invest in Companies You Truly Understand

Don’t forget that once you buy a stock, you essentially become a partial owner of the business you just invested in. This means that if you choose to put your money into a random company that you know nothing about, you might be accidentally sabotaging your own efforts. For this reason, before buying a stock, you should stop and ask yourself whether you’d trust yourself to act as an owner of the company whose business you don’t really understand.

Additionally, you should also take into account the companies that you may impact indirectly. That’s because plenty of companies don’t deal directly with their customers. For instance, when you go to a pharmacy to buy your prescription, who’s the one making the medicine you buy? What kind of equipment do they use in the process? You can research various sectors and find different competitors in each industry in order to understand how a certain business you want to invest in really makes their money and what you’re getting yourself into by buying a part of their stock.

Choose Stocks That Have a Margin of Safety

Another good practice to follow when trying to determine how to invest in stocks wisely is to buy companies trading below your estimate for a fair price. In other words, when the market price of a security is significantly below your estimation of its intrinsic value (the value of an investment based on its cash flows), the difference is the margin of safety you should be looking for.

Different investors may set their own margin of safety according to their own risk preferences and the exact numbers will vary from person to person, but, in general, buying when this difference is present enables you to make investments with minimal downside risk (the probability that an asset or security will fall in price).

Check Corporate Presentations

If you determine that it is a good investment after looking into a particular industry that interests you and you’ve familiarized yourself with the most important players, you can go a step further and look into investor presentations. They aren’t as comprehensive as financial statements, but still provide a solid general overview of the ways companies make their money and are much easier to go through than the complex 10-Q and 10-K reports.

The goal of any investor presentation is to tell the story of a company to the potential investors in a simple and compelling way. These reports will also provide forward-looking information on the expected direction of the company. By browsing company websites and presentations, you will also be able to see whether it might outperform its competitors in the industry.

In Conclusion

As you can see, there’s a lot of research involved into determining the best stocks that you can buy. A lot depends on what kind of investor you are, so make sure that you don’t start investing without particular goals in mind.

Besides figuring out what your goals are, make sure to invest in companies you truly understand, opt for stocks that have a margin of safety, and go through corporate presentations to make the most informed decisions. If you follow these steps and manage to build a diversified portfolio of stock picks in different sectors, you'll surely find some winning investments and opportunities.




Newsletter

Subscribe to our newsletter to get notified of new blog posts from Check-a-Salary