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May 25, 2017

How to Choose a Stock


Choosing a stock can be extremely overwhelming, particularly for those with minimal investing experience. While there are many different ways to invest, including mutual funds, bonds, and other options, many people choose to work with individual stocks for simplicity. This can be somewhat risky, so it is important to be very careful and discerning when choosing a stock, especially in the beginning. Here are some tips that can help you make a smart decision.

Start out with what you know.

Familiarity with a company makes it easiest to invest effectively, so when you are choosing the first few stocks for your portfolio, go with companies that you have interacted with in your life. It can be difficult to assess just how successful a company actually is through their business plans and earnings reports, but if you know that the chain store or restaurant down the road is always packed, or that all of your friends are buying a certain new tech product, that can be a good indicator that the business is doing well. Of course, you’ll still need to assess their earnings and business plan, but it takes some of the pressure and stress out of it.

 

Assess revenue and debt levels.

If you invest in a company that isn’t financially stable, you could unintentionally end up with a recipe for disaster. Many companies are able to fake financial stability with their marketing, so it is important to really go through all of their reports before making a decision. The two things you should look at are revenue and debt. If a company has a high level of money coming in, that’s a good indicator of a healthy business. However, you’ll also want to make sure they don’t have a huge buildup of debt, which can negatively affect the business.

 

Check the price to earnings ratio.

Ideally, you’ll want to look for stocks that provide great value for the money, just like you would when you are purchasing anything else. The way to check for this is through the price to earnings ratio. This is a measurement that compares the current price of the stock to the amount of money that the company is making. You can then compare that number to the company’s competitors to see what its value is.

Try to find a dividend.

Although not every company pays dividends to its investors, if you can find one that does, you’ll know you’ve made a good choice. You’ll get some extra income from the stock, and you’ll know that the company is doing well because they are stable enough to pay you.

 

Don’t be put off by price or volatility.

Individual stocks do tend to change in price more often than mutual funds do, so don’t be discouraged when the value of your investment goes up and down. If the value of a stock dips, it is much more likely to eventually go back up than a mutual fund or other type of investment would. High prices also aren’t necessarily a bad thing – if the value keeps going up, you could end up with a huge sale at the end. Just be sure to know when to get out by keeping an eye on the company’s financial reports.

About Kenneth