New to investing and have stocks on your mind as your first choice of investment? Then take a look at these five top tips that all investors should consider when looking to get a good head start when looking to choose the best individual stocks.
A Beginners Guide In Buying Individual Stocks
If you are a beginner investor that is looking to jump into the world of stocks by now you will have an understanding that there is a lot that is involved when looking to choose and invest in the right stocks, especially as investing in individual stocks is a great way to build wealth when done right.
And realistically it will be one of the main objectives you're looking to archive, just like most or if not all investors that are out there today.
But before we jump straight into the top five tips to help you become a savvy investor, it's worth noting that there are many other key factors to address and consider before you jump headfirst into investing in stocks.
These key factors include making a budget, determining your investing needs in terms of whether you are looking to make money quickly or looking for long-term appreciation. And additionally, try and seek what strategies you are looking to undertake within your journey such as if you wish to make money quickly by looking at day-trading or swing-trading, or if you are looking more in the long-term image of the buy and hold strategy.
Aside from the above factors, there are many more that will help you start from the very bottom to address where you stand before you commit yourself to your chosen investments which is strongly advised.
It is wise to know exactly what it is you are looking to go into and know the full understanding of the basics of a stock, along with knowing a couple of other key factors that are essential for you to be aware of that will also make it easier for you when seeking to invest in individual stocks.
As Benjamin Franklin once stated, “An investment in knowledge pays the best interest.”
Contents:
- What Is A Stock?
- What Is Stock Market Capitalization?
- What Is A Dividend?
- Five Top Tips to Help Beginner Investors When Looking to Invest in Individual Stocks
- Overview: How Beginners Can Buy Individual Stocks
- eToro - Buy Stocks with 0% Commission
What Is A Stock?
A stock or stocks represent a fractional share of ownership within a company. In simpler terms you become a part-owner of a company when you buy shares of that specific company, so all the earnings that a stock will make typically a shareholder is entitled to a fraction of what that company makes.
For organisations, stocks are a way to raise money to build further growth in terms of products, services and any other initiatives.
It is worth mentioning that there are two variations, common or preferred stock. Common stock is what you will become more familiar with at the start of your journey and typically what you will commonly hear when you hear that an investor says that they have invested within a stock, it represents a share or shares within a company.
Whereas preferred stock entitles shareholders to have a fixed or premeditated dividend payment that takes priority over ordinary share dividends.
The key differences between the two is that common stocks do tend to outperform preferred stocks, and other investments such as bonds and more, whilst they also offer greater growth leading to great gains in the long-term outlook.
With preferred stocks the benefits over common stocks is that shareholders are guaranteed dividend payments regardless of how well a company performs, and secondly preferred shareholders have priority over common shareholders when it comes to being paid their dividends.
In regards to both variations, they both hold strong advantages and it is strongly recommended throughout your stock trading journey to have a mix of both within your portfolio in order to provide diversity and make your collection that little bit safer and potentially more rewarding.
What Is Stock Market Capitalization?
A stock’s market capitalization or more commonly known as market-cap is a metric that is used to determine how many outstanding shares a stock has, whilst it is also used by many investors to determine how big a company is when comparing against another.
The way in which a company’s market capitalization is calculated is by taking its market cap and multiplying it by its current share price. For example, if a company holds a market cap of $40 million it means that the stock has 1 million outstanding shares at a share price of $40.
Additionally, another important factor to consider when beginning your journey into investing in stocks is that a company's market cap is more important than looking at a company’s share price, as this metric enables investors to evaluate a certain stock with other stocks sitting within the same field as one another.
For example, you can not compare a large-cap stock such as Walmart Inc (WMT) with a market cap of $396 billion to a small-cap stock such as Rocky Mountain Chocolate Factory Inc (RMCF) with a market cap of $36.45 million as both companies are in different leagues in terms of size.
The three categories for stocks based on their market capitalisation are:
- Small-cap: A company that typically holds a market cap of between $300 million - $2 billion.
- Mid-cap: A company that holds a market cap of between $2 billion - $10 billion.
- Large-cap: Stocks that hold a market cap of over $10 billion.
In the advanced world that we are currently living in, this is causing some stocks on the market to be pushed through the roof leading various companies to be classified as mega-cap stocks. Mega-cap stocks are companies that have a market cap of over $200 billion.
What Is A Dividend?
One of the last points to mention before we head into the top five tips for beginners looking to invest in individual stocks is understanding what is meant by a dividend.
Dividends are quarterly payouts paid from a company’s profits to its shareholders. The way of determining how much a company is paying in dividends is by looking at a stock's dividend yield or dividend price ratio, as this will give you a clearer indication of the actual payout sum that shareholders are gaining.
You will also at some point come across the term dividend investing. Dividend investing is a strategy that investors may look to adapt within their stock trading journey by holding a portfolio of dividend stocks. This strategy will provide a passive income stream that is advised to be stretched across over a number of years as it is a great way of investing when looking at retirement.
Typically because dividend stocks hold lower growth potential than growth stocks, as growth stocks look to reinvest profits to enable greater growth to create bigger returns to their shareholders, dividend stocks take their earnings and divide it across the board whilst reinvesting smaller amounts for further growth.
Having a collection of both is strongly advised when going through your trading journey for clear reasons as mentioned including balancing out your investment collection, as you will gain a passive income stream with experiencing great asset appreciation from your long-term growth stock investments, along with lowering the risk factors within your portfolio.
Tip - If you see a company increasing its dividend this does not necessarily mean the increase is a good thing. It could signal the company is in trouble and has looked to increase their dividend in order to attract further investor attention.
Another point to consider is that a high dividend could be harder to sustain for certain companies, leaving the outcome to be potentially catastrophic for all involved.
Five Top Tips to Help Beginner Investors When Looking to Invest in Individual Stocks
After looking at the key elements and metrics above, now let's look at the ways beginner investors can reduce downside and the key factors to consider when looking to invest in individual stocks.
Tip One: Do Your Homework
The first and one of the most vital starting points for both beginner and experienced investors is to conduct as much research as possible, from the beginning all the way through to the end of your journey.
Although research can be time-consuming, it is knowledge at the end of the day that is going to make you a savvy successful investor throughout your investing journey and can be one of the reasons that causes stock market trends. Stock market trends signal a direction of price movements or strong volumes of shares being bought or sold.
Taking a look at a stock's fundamentals is essential for a beginner investor as these will determine whether the stock is a good investment. A stock's key fundamentals include revenue, market capitalization, earnings growth, assets, liabilities, considering risk factors and other key metrics such as price-to-earnings ratio (P/E), dividend yield and more.
Alongside the above fundamentals, there are many other factors that investors can look into to confirm if a stock is a worthy asset, but for a beginner investor it can become overwhelming and challenging to understand at the start of the process what is involved when looking into a stocks technical analysis, you don’t want to over complicate things from the get go.
When researching you may come across mutual and index funds which are popular vehicles amongst beginner investors. These funds are designed to offer investors exposure to top-performing stocks whilst being professionally managed, causing these stocks to be safer investment options for beginners.
Both mutual and index funds are typically made up of a collection of stocks, bonds and other securities that track leading indexes such as the S&P 500, Nasdaq and more. But we will dig further into this down the line.
The best guidance is to invest in time, however long it may take you to understand and research individual stocks is irrelevant so long as you find your feet first. Then decide what industry or industries are of interest, along with factoring in your financial capabilities and start further researching into individual stocks within these certain sectors.
Read Also: What Are The Best Stocks To Buy For Beginners?
Tip Two: Invest In What You Know
When starting out looking at individual stocks you may be drawn into stocks that you already know something about, even though they may not be the best investments on the market at that time. This is where your research will play its main part before you look to invest in such investments.
As mentioned, picking out certain industries of interest is one of the first steps to take as this will help by narrowing down your options, take the technology sector as an example.
Now you have picked a sector you can now look at the companies within this industry that are sitting within your price range that potentially you may know a little about, and apply your knowledge that you have gained to determine if this stock is a good asset.
A good example of a tech stock that is globally recognized for its products and services all around the world and continues to be a top-performing stock is Microsoft Corp (MSFT). The stock is currently up 55% over the year and is currently trading below its intrinsic value with the stock looking to add to its dominating success with the company poised to potentially report another killer quarter on the 27th April.
Additionally, if you don’t feel confident to make the step to invest in stocks on your own knowledge, there are other options such as professional asset managers that can take care of this for you.
Qualified professional asset managers (QPAM) are investment advisors that are full of an array of investing knowledge on specific industries.
These qualified professionals will look and dig deeper into specific stocks technical analysis by using charts, graphs and other methods in order to get that full and final confirmation if a stock is looking to be a good investment, something that you will more than likely not be up to speed with at this stage.
So if you do not feel confident to enter this world alone at the start you do have other options to get you on your way until you are ready to take your own lead.
Tip Three: Make Value Key, Don’t Follow The Hype.
Even though its many investors aim to become wealthy when looking to invest in stocks, by looking into stocks with the brightest growth potential or by following the latest trends, these routes are not necessarily the best routes to take, especially at the start of your investing journey.
By following trends or chasing a stock that holds a very attractive, almost too good to be true price-to-earnings ratio (P/E) typically indicates that this can be the case and could potentially see strong downside, so it's best to avoid stocks that are showing these indications.
This is why it pays to seek value when looking into a stock to limit your risk factors.
A good critical factor about value stocks is that these stocks work well in a recovering economy, like the world is currently going through or during weak economic periods.
This is because value stocks hold strong balance sheets and have a steady flow of business, whilst some may also be trading at far lower prices than what the stock is actually worth, making a stock undervalued.
Dow Jones U.S. Large-Cap Value Total Stock Market Index returned just under 43% YoY, with an annual return of 8.37% over the past 10 years. The index is designed to measure the performance of large-cap U.S. equity securities who are mostly value stocks.
A good value stock to take a look at right now is AbbVie Inc (ABBV).
AbbVie Inc (ABBV) is a stock that is going from strength to strength as the company looks to continue its double-digit run with its earnings per share (EPS) growth, with ABBV stock increasing its EPS by 20% over 2020. Secondly, the company’s revenue grew by almost 40% in 2020 to $45.8 billion.
The company has a strong portfolio including the stocks best-selling drug on the market, Humira which was recently approved in the U.S. Along with the stock having strong growth potential looking to the future with the company having at least three products in the pipeline potentially getting set for approval over the coming year.
If you are looking to invest for the long-term, AbbVie Inc is looking like one of the best long-term value stocks on the market today that is also a good dividend payer.
Tip Four: Look At A Collection, Rather Than Individual Stock Performances
If you are considering investing in more than one stock, then going down the route of investing in mutual funds or exchange-traded funds (ETFs) are a fantastic way of giving investors exposure to a collection of stocks along with these funds being fully managed by a portfolio manager.
For both experienced and amateur investors, these funds offer relatively steady returns with the added bonus of low fees, along with being less time consuming as this is all taken care of for you and offer stronger potential in order to achieve greater returns due to the professional management.
When you compare this route to investing in individual stocks, this can be challenging and can hold stronger elements of risk when looking to pick a collection of individual stocks based on your own learnings at first hand, but this is not to say it can’t be done.
Some of the best performing ETFs have returned over 90% over the past year, with many more investors looking to add these investments into their portfolio in 2021. Here are three good ETFs to consider:
- MicroSectors U.S Big Oil Index 3X Leveraged ETN (NRGU) - returned 120% so far in 2021 and returned 203% over the past year.
- Direxion Daily Retail Bull 3X Shares (RETL) - returned 115% so far in 2021 and returned 1612% over the past year.
- Direxion Daily Regional Banks Bull 3X Shares (DPST) - returned 93% so far in 2021 and returned 330% over the past year.
Mutual funds as mentioned are another popular way of investing that offer great value and diversity, whilst holding similarities to ETFs. A great example of a performing mutual fund in 2020 was Delaware Smid Cap Growth Institutional (DFDIX) with the fund returning 82% over 2020.
Additionally here are three mutual funds to consider in 2021 for both the short and long-term outlook:
- Vanguard Small Cap Value Fund (VISVX) - performance YTD: 20% - Expense ratio: 0.7%
- Vanguard Windsor II Investor Shares (VWNFX) - performance YTD: 16% - Expense ratio: 0.34%
- Shelton NASDAQ -100 Index Fund Direct (NASDX) - performance YTD: 8.54% Expense ratio: 0.50%
Tip Five: Invest For The Future, But Know When To Stop Investing
Whether or not you are looking to invest for the short-term or the long-term it is worth taking into consideration all aspects when you first look to enter the world of investing in stocks.
If you are looking to buy individual stocks with the aim of holding them for the long-term, you still have to factor into the equation that you will potentially be looking to sell these stocks at some point down the line, as refreshing your portfolio is another strong advisory. This is why forward-thinking helps before placing your investment.
Likewise, one of the best tips that beginner investors will learn along the way is knowing when to stop investing. This skill will come in time as you learn when the ‘perfect’ time is to enter an investment based on how the stock is currently performing, its fundamentals and factoring in the stocks share price.
This strategy is also commonly known as market timing as by taking in all of a stocks key fundamentals, without intentionally realising you are making your own predictions which way you are seeing this stocks price movements heading.
To sum up, at the start of your trading it's worth it for all beginner investors to seek to invest in the long-term, as it is ultimately the key winner to achieve greater returns.
Short-term trading does still have its advantages as investors take advantage of stock price movements in order to gain returns quicker, but if your overall investing goal is to build on wealth, short-term returns will be a fraction of what can be made from investing in long-term investments, it pays to hold and know when to put a halt of investing.
Check Out: 10 Stocks That Are Screaming Buys Right Now
Overview: How Beginners Can Buy Individual Stocks
For a beginner investor, there are plenty of options to go at on the market today. From choosing safer investment options such as mutual funds, ETFs and bonds to hand picking your own collection of individual stocks, or have a diverse collection of both, the option is entirely yours.
By adapting these guidelines above it will help you gain the basic knowledge and understandings of what is entailed and what to look for within a stock or stocks of interest at the beginning of your journey into investing in individual stocks.
It will also help broaden your investment horizons in looking to create a collection of investments rather than just investing into one stock, which will hold extremely high-risk factors.
Additionally, these points will also help you to further build up your confidence and your knowledge for you to take with you as you develop within the world of investing, as you may potentially seek to look for more challenging investment options as the years move ahead.
One final strong point to consider when looking to invest in stocks at the beginning is to keep value stocks a key focus, and before you invest take all into account as these stocks are great long-term assets. As Warren Buffett once said, “Price is what you pay. Value is what you get.”
A gentle reminder - Risk factors should always play a central role within your decision making, as all investments carry their own risk elements.
Before you look to place your money into any investment it is wise to make sure you have dotted all the i’s and crossed the t’s and you're left feeling 100% confident with your chosen stock pick, if you have certain doubts it’s wise to hold off until these doubts have been confirmed.
Additionally, unexpected risks can happen at any time, it comes as part of the package when investing, so it pays to always be prepared for the unexpected.
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