A Beginners Guide to Picking Stocks

Sharks, killer clowns, Dow Jones Industrial.These three things, while vastly different, represent huge fears for a good number of people. Even though the stock market probably won’t play the main character in a horror flick, investing in company shares gives a lot of people the heebie jeebies.

 

Honestly, it’s a respectable fear. There are no guarantees and plenty of stories about people who lost lots of money when the market took a bad turn. Unfortunately, the stock market is a bit more of a boogeyman than it deserves to be. Smart spending usually leads to good returns,and if you get past the fear of a market collapse, stocks provide a solid long-term investment.

 

If you’re looking for a simple, foolproof way to invest in stocks, you should plan on searching for the rest of your life.The stock market is volatile, unpredictable and ever-changing. There’s no way to guarantee  steady returns, and that’s part of what makes it so scary. Fortunately, there are ways to mitigate risk and approach your investments sensibly. I’ve learned a lot of lessons in my years of investing, and I’ll do my best to pass that knowledge onto you.

Buy What You Love

When I tell people to do this, I usually get a blank stare in return. People can’t think of what stocks they love, because they don’t know which ones are going to shoot up in value. It’s a simple point,but it’s always worth repeating: you’re buying a share in a company. The stocks you buy give you a stake in a particular enterprise, and it’s my belief that you should own shares of companies you’re proud to support.

 

Still not sure what that means for your investment strategy? Let’s break it down a little further. Do you have a blender that’s worked flawlessly for 10 years? Sounds like an excellent appliance made by a quality manufacturer. Do you love a particular streaming service that delivers great content to your television at an affordable price?That seems like a good business model, maybe you should consider owning a portion of that company.

 

When you’re figuring out how to pick stocks,you can’t think about it as some sort of crazy equation. You’re buying shares of a business, and you should make sure the shares you own represent companies you like. This doesn’t mean it’s safe to go chasing penny stocks, looking for small companies you hope will one day succeed. Instead, pick up stock in car manufactures, tech firms and popular clothing designers. The shares might not be cheap, but chances are relatively high that they’ll increase in value overtime.

Dividends

The importance of dividends depends on how much you’re investing. If you only have a few hundred dollars in your investment account, your dividend yield won’t be that impressive. As you invest more, the payouts increase and you have the opportunity to compound your earnings and grow your wealth even more.

 

Not all stocks pay dividends, and you shouldn’t dismiss a certain company just because it doesn’t pay its shareholders. However, as you sort through companies and think about which stocks you want to bring into your portfolio, pay attention to which businesses offer shareholders a percentage of their earnings. Dividend payments help boost your returns, and companies that make these payments are typically stable,low-risk stocks to own.

 

During the early stages of your stock trading,you want to keep risk to a minimum. Down the road, when you have lots of funds and a diversified portfolio, you can dabble in unconventional purchases. For beginners, it’s best to view your account as a long-term vault where money will grow and you don’t have to concern yourself with Wall Street’s daily activity.If you enter the market intending to make money fast, there’s a good chance you’ll leave the market fast, without having made any money.

Look for Value

This is where a lot of people get hung up.It’s easy to confuse a valuable stock with one that’s cheap, but that misses the point. You can pay $90 per share and still get a good value, as long as you know how to evaluate what you’re buying.

 

Finding undervalued shares is harder to do when you’re new to stock trading, but it still can be done. One of indicators investors look at when searching for cheap stocks is the price-to-earnings(P/E) ratio. If you want, you can do the math yourself and divide share price by a net income. For those of us who don’t love doing division all day, an internet search is usually a solid way of finding a P/E.

 

Once you’ve figured out that ratio, there’s still work to be done. You can’t just see one company’s cost/earnings ratio and know whether or not the stock is undervalued. The next step is to compare a given P/E to that of other businesses in the same industry. That allows you to see market value compared to companies in a similar standing. To test this system out, go look at stock prices for different fast food restaurants, then compare the P/Es for those businesses. You might not find an undervalued stock,but the research could help you understand why one company is worth less on the exchange.

 

Finding value is the key to successfully investing in stocks. When you learn how to spot undervalued companies (within an industry you know and love), making smart purchases becomes a lot easier.

Think It Through

The best investments will come after you weigh all the outside factors, monitor some trends and ask the right questions. As you read about stocks and compare prices, you might come across a company you hadn’t originally considered for your portfolio. It’s important to be open minded as you investigate the market, as that will help you find the best value.

 

Most of all, you shouldn’t be afraid when you start to invest. As long as you’re buying into good companies, your money isn’t going to instantly vanish. The market always experiences ups and downs, but it continues chugging along and rewarding those who are patient. Buy what you love, spend what you can afford, and let your shares do the rest.

Share
Ask a Question