How to Pick the Best Stocks to Invest in
Picking the right stocks is essential to traders and investors. We’ve put together a complete, step-by-step guide for new investors to help you pick the best stocks to invest in.
Fancy investing but no idea how to pick stocks? You are not alone. There are heaps of stocks to choose from in the online space so it can be daunting for anyone. Chances are you are brand new to stock investing and just need a helping hand.
Or perhaps you are a seasoned trader, just looking to add some stocks in order to diversify your portfolio. Either way, this guide is going to clear the mist on how to pick stocks yourself.
For instance, it isn’t always the best option to go with the oldest or biggest companies. They are a safe bet but don’t always provide great returns. If you think about it, the biggest rewards often come with the biggest risk.
To help you decide what your own stock investment goals might be - we’ve saved you some leg work and put together a guide on how to pick stocks.
This guide will explain how to pick the best stocks to invest in. We also cover some of the many helpful tools and indicators you might want to consider to help with your research process, alongside some tried and tested strategies on how to pick stocks on a DIY basis.
How to Pick the Best Stocks to Invest in
To pick the best stocks to invest in, the first step is to do your research and understand the company, look at the viability of the company, diversify your portfolio, and lastly control your emotion, it is the enemy of investing.
To help speed up the process, we have put together a comprehensive steps on how to pick up stocks:
- Decide to pick one stock or more.
- Pick a strategy for trading stocks.
- Decide how long you want to hold the stock.
- Choose a broker and place the trade.
- Execute the trade.
Part 1: How to Pick Stocks - Fundamental Metrics to Consider
There are thousands of stocks to choose from, and thousands of hundreds of platforms offering access to them. With so much choice, it can be hard to see the forest for the trees!
Taking that into consideration, for part one of our How to Pick Stocks guide, we have put together a short list of fundamental metrics to consider. This should help you when deciding which kind of stocks or sectors you want to invest in.
What Particular Stock Market Exchanges do you Want to Focus on?
As you likely know, a stock exchange is a marketplace for sellers, buyers, and traders to swap equity assets. There are heaps of stock exchanges around the world. However, less than 20 of them are in the ‘$1 trillion club’. This simply means that all of the stocks listed on the exchange have a collective market capitalization of over a trillion dollars.
Without hesitation, the biggest stock market on the planet is the New York Stock Exchange (NYSE). As of this year, the exchange surpassed equity capitalization of more than $25 trillion. The next largest exchange markets are the NASDAQ, London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE). These exchanges contain thousands of large-scale shares.
Put simply, firms listed on the aforementioned exchanges sell shares of their company. This gives your average Joe the chance to get a cut of the pie, by means of investment. At the time of writing, investable stocks with the highest market momentum include Tesla, Quidel Corp, Amazon, and Peloton - to name a few.
Back to exchanges - below we have listed some of the many markets that you might want to consider when picking stocks to add to your portfolio.
- New York Stock Exchange - NYSE - USA
- Nasdaq - NASDAQ - USA
- Japan Exchange Group - JPX - Japan
- London Stock Exchange - LSE - UK, Italy
- Shanghai Stock Exchange - SSE - China
- Hong Kong Stock Exchange - SEHK - Hong Kong
- Euronext - Amsterdam, Brussels, Dublin, Lisbon, Oslo, Paris
- Toronto Stock Exchange - TSX - Canada
- Shenzhen Stock Exchange - SZSE - China
- Bombay Stock Exchange - BSE - India
- National Stock Exchange - NSE - India
- Deutsche Börse - FRA - Germany
Before you can invest in stocks and shares, you will need to think about which markets you want to focus on. That’s not to say you can’t choose more than one.
If you’re looking at accessing the UK market you are likely to use the largest exchange - the London Stock Exchange. This exchange is made up of huge companies such as Tesco, Royal Dutch Shell plc, Unilever, BP plc, Royal Mail, and British American Tobacco.
You might also consider the Alternative Investment Market (AIM) - which is the UK’s secondary exchange. This hosts smaller companies that are not quite yet big enough to make the transition to the larger LSE.
Should you fancy the US markets, the NASDAQ is home to giants such as Tesla, Disney, Facebook, Microsoft, Apple, and PayPal. In Europe, there are heaps of exchanges too, with five being considered major in terms of market capitalization.
Ultimately, by investing in shares from different markets, on an international scale, you can diversify your portfolio nicely.
Do you Want to Focus on a Small or Large Company?
We’ve mentioned some big players so far, but you do have plenty of options with regards to the size of the company you invest in.
Granted, blue-chip stocks are less vulnerable when it comes to market downturns. This is largely due to their impressive valuations - usually totalling billions of dollars. However, your returns are likely to be much smaller.
As such, publicly listed companies that are thought to be small to medium shouldn’t be ruled out either. Sure, these firms are considered to be a more risky investment than multi-billion-pound companies. But, you will usually find that these are the stocks that provide bigger upside potential.
When it comes to stock size, let us give you a quick rundown of how these companies are categorized
- ‘Micro-cap’ stocks have a market capitalization of less than $300 million
- ‘Small cap’ stocks are defined by having a market capitalization of between $300 million and $2 billion
- ‘Mid-cap’ companies will be valued between $2 billion and $10 billion
- ‘Large cap’ falls between $10 billion and $200 billion
- ‘Mega Cap’ indicates a market-capitalization of above $200 billion
We’ve put together a list of some stocks of different sizes to give you an idea:
- Micro-Cap Stocks - Funko, Mesa Air Group, Century Casinos, Vera Bradley, Universal Technical Institute, Jumia Technologies, Liberty Trip Advisor, Forterra
- Small-Cap Stocks - Axos Financial, Tupperware Brands Corp, Textainer Group Holdings Ltd, Innovative Industrial Properties
- Mid-Cap Stocks - Teledyne Technologies, Peloton Interactive, Livongo Health, Five Below, Cabot Microelectronics, Helen Of Troy, CMC Materials
- Large-Cap Stocks - Alphabet (Google), Alibaba Group Holding, Microsoft, Apple, McDonald’s, Docusign, Regeneron Pharmaceuticals
- Mega-Cap Stocks - Tesla Motors Inc, Intel Corporation, Merck & Co, Bank of America, Netflix Inc, Berkshire Hathaway, UnitedHealth Group, Adobe Systems Inc
You can also incorporate small-cap (or whatever size tickles your fancy) stocks by investing in an ETF that concentrates entirely on smaller/larger firms. Although not all of the stocks listed will be available via an ETF, you won’t be short of options.
Read More: What Top 15 Stocks Will Explode In 2021?
Is it Important you Receive Dividends From Your Investment?
In the name of clarity, let’s assume you don’t know what dividend stocks are. Put simply,- you will be paid a share of the company’s gains. After all, you are invested in the firm.
Choosing a company offering dividends shouldn’t be a deal-breaker for you. But, it is a great way to soften the blow if or when one of your investments pales in value.
On the other hand, we should note that non--dividend firms make up some of the most well respected and successful stocks. For example, Facebook, Google, Tesla, and Amazon have never given out a single cent in dividend payments
This might seem a bit tight-fisted, but there does seem to be a method behind these giants not paying dividends to investors.
The logic behind this appears to be that these stocks typically reinvest their profits into new ventures. In doing so, this will lead to greater returns for you in the long run via capital gains.
In other words, they put that money towards financing the future growth of the company. As such, this should theoretically be beneficial to you in the future.
What is the Cost of a Single Share?
You also need to consider the cost of a single share. For example, some stocks cost well over $1,000 each.
Let’s give you a few examples of the most costly stocks in the world right now, starting on the smaller end of the scale:
- Booking Holdings (Booking.com) is $1,917 for a single share
- At the time of writing a single share of Amazon Inc is going to set you back $3,294 per share
- Lindt & Sprüngli AG sits at $80,300 per share
- Whereas investing legend Warren Buffett’s company ‘Berkshire Hathaway Inc’ would set you back an eye-watering $327,401 per share
Not many of us have 6 or even 4 figures set aside for investment purposes, or otherwise. Thankfully, brokers like eToro offer ‘fractional stocks’.
This means that instead of having to buy a whole share, you can just buy a fraction. The best part is that you no longer need to wait for a ’stock split’ of the company to be actioned! For example, if you invested $50 into a company that was priced at $500 per share, would own 10% of that particular stock.
Consider Stock Market Sectors/Industries
When learning how to pick stocks, it’s a good idea to consider what kind of industry you might want to invest in.
Although we believe you should run a diverse portfolio, it’s a good starting place to consider whether you want to invest in stocks from the tech industry, or maybe pharmaceuticals, etc.
We’ve listed below 10 stock sectors alongside some of the most popular shares within each category.
- Health Care - Johnson & Johnson, UnitedHealth Group, Abbott Laboratories, Merck, Thermo Fisher Scientific, Biogen Inc, CVS Health Corp, Livongo Health Inc. And more
- Materials - Ecolab Inc. (ECL), LyondellBasell Industries NV, DuPont de Nemours Inc. (DD), Huntsman Corp. (HUN), Eagle Materials Inc, Ardagh Group SA, Berry Global Group In. And more
- Consumer Staples and Consumer Discretionary - Think Coca-Cola, Campbell’s soup, McDonald’s, Colgate, PRoctor Gamble co, Estée Lauder. Home Depot Inc, Nike Inc, Starbucks, TJX Companies. And more
- Information Technology - Tesla Inc, IBM, Zoom Video Communications Inc, Livongo Health Inc, NortonLifeLock Inc, Salesforce.com Inc. And more
- Communication Services - Zillow Group Inc, Twilio Inc, Russell 1000, Communication Services Select Sector. And more
- Financials - Wells Fargo, Morgan Stanley, PayPal, Unum Group, Brighthouse Financial Inc, MetLife Inc, White Mountains Insurance Group Ltd, Jefferies Financial Group Inc. And more
- Industrials - Waste Management, Raytheon Technologies, 3M, GrafTech International Ltd, Air Lease Corp, Energizer Holdings Inc, Quanta Services Inc. And more
- Energy - Cheniere Energy Inc, NRG Energy Inc, Murphy Oil Corp, Valero Energy Corp, Antero Midstream Corp, ConocoPhillips, Williams Companies Inc. And more
- Utilities - PPL Corp, Sempra Energy, NRG Energy Inc, Eversource Energy, Public Service Enterprise Group Inc, NextEra Energy Inc, Sempra Energy. And more
- Real Estate - Brookfield Property REIT Inc, Brandywine Realty Trust, Utilities Select Sector, CoStar Group Inc, SBA Communications Corp. And more
No matter what stock you end up choosing, you should always be mindful of how global events such as the COV-19 pandemic could affect your investment. In other words, you are unlikely to be choosing any ‘beach’ industries right now - like airlines, cruises, and hotels.
Part 2: How to Pick Stocks - Thinking about the Sustainability of the Shares
Thinking about the sustainability of stocks you are interested in sounds fairly obvious, but it’s crucial that you view the viability of a firm from a business/investment point of view.
- “Where will the company be in the next five to ten years?”
- “Will this firm ever recoup it’s elevated stock prices of the past?”
With this in mind, you should be considering the following metrics when assessing the viability of the shares.
Current Stock Value of the Company - Relative to Historic Highs
Stocks, like any other asset, change in price frequently. However, one of the pieces of data most important to you when picking stocks is the company’s all-time price high - compared to its current valuation.
Generally speaking, it is considered to be a good sign if the company in question has a higher valuation than it had 12 months previously. Although in the stocks and shares arena, it’s not as cut and dry as that. The valuation of a company is very much reliant on supply and demand in the market.
In other words, if there are more people selling than buying - the price of a stock is likely to decrease. Therefore, when there are more buyers than sellers - the value will increase. This is because, in the latter scenario, the stocks are undervalued.
These are important metrics to look out for when learning how to pick stocks. It doesn’t offer 100% assurance that the company’s stock will ever return its stock price glory days. However, it’s always better to be as informed as possible when choosing stocks to invest in.
Are you Able to Access Discounted Shares?
There are times when it’s easier as an investor to access stocks at a discounted cost. For instance when there is a global news story such as COVID-19.
This resulted in major companies losing tens of percentage points in price, largely due to the markets going into panic-mode.
This would be a good time to buy some stocks at a super low bargain price, catching the market downfall.
Is There Room for the Company to Grow?
Some of the fastest-growing companies around the world grow so large that they end up leveling themselves out. Think along the lines of Microsoft, IBM, and Ford.
Whilst these huge companies can of course continue to grow in every direction - you are unlikely to get the returns you would have in the company’s heyday. Unless you are bagging yourself some discounted stocks as we mentioned above.
Then on the other end of the scale, there are considerably smaller companies. Firms like Netflix, Uber, and Pinterest which haven’t been around for as long as the aforementioned giants - are instead just starting their journeys.
This gives you a better chance of experiencing the increasing market points of a relatively new company. This means you may be able to hang on the coattails of the company’s expected and continued growth.
Ready to dive into the Stock market?
Part 3: How to Pick Stocks - Diversify Your Portfolio
When it comes to diversifying your investment portfolio, you should have a firm understanding of price charts, fundamental and technical analysis, earnings reports, and more. The aforementioned tools can take months, if not years to master.
With that in mind, you will be pleased to learn that there are a plethora of methods out there to assist. These features allow you to select stocks and shares to invest in without having to learn the ins and outs of analysis first.
Let’s start with stock market indexes, before diving right into Copy Trading features and ETFs.
Give Thought to Stock Market Indexes
Many people opt to invest in shares via a ‘stock market index’. In case you aren’t aware - this enables you to invest in multiple companies at once - using just one investment.
Let’s hypothesize that you are interested in investing in the S&P 500 index. The S&P index consists of the biggest U.S. publicly traded companies such as; Apple, Microsoft, Facebook and Johnson, and Johnson.
This index is considered to be low risk, not least because it is diversified across 505 stocks - all of which you would be purchasing shares in.
Another popular index is the FTSE 100, containing 101 stocks from the biggest blue-chip companies on the London Stock Exchange. Such firms on the index include Royal Dutch Shell, BP, British American Tobacco, Unilever, and heaps more.
By investing in indices such as these you are able to diversify your portfolio - without having to master analysis and financial reports to get involved.
Put simply, by investing in an index, you are able to spread your investments thinner - with low expense and maximum exposure. The overarching concept is that both depreciating and appreciating stocks will balance each other out. But, over the course of time, the latter will outpace the former.
Try a Copy Trading Feature
Copy Trading is a phenomenon that has made big waves in the stocks and shares scene. This feature - offered by leading broker eToro, enables you to copy the trades of a seasoned investor - on a like-for-like basis.
The idea behind this innovative feature is simple. Copying another investor means that you no longer need to learn the tools and charts involved with analysis. Instead, you can invest passively in stocks by electing to mirror the investments of another trader.
You can pick an investor based on the information provided to you. This usually includes; what stocks they focus on, how much risk they like to take, and past and present performance as a ‘copied trader’.
This is just another way to gain maximum exposure to a diverse range of stocks, without having to layout thousands to buy a full share. Not only that, but you can copy more than one trader at a time.
Exchange-Traded Funds (ETFs)
Similar to stock indices - ETFs enable you to invest in several companies via one single investment.
ETFs are managed by portfolio managers who handle the investment for you - buying and selling shares when deemed necessary. You will find that different ETFs focus on different things.
For instance, some will monitor particular market indexes like the FTSE 100. Whereas others might track specific sectors such as the materials, healthcare, or tech sector.
Furthermore, some ETFs will purely concentrate on companies that dish out high columns of dividends. Investing in stocks this way is a great way to diversify your investment portfolio without having to decide which stocks to choose yourself.
This cuts out the need to perform hours of research on end or brushing up on your technical analysis skills.
Part 4: How to Pick Stocks - Utilizing Fundamental and Technical Analysis
When asking how to pick stocks, the most experienced investors will tell you that you need to perform a lot of research. After all, it’s important to make decisions based on the company’s performance financially, in order to predict the viability of the firm’s stock.
As we’ve said, reading the markets and analyzing a company’s financial performance can take years. Not to mention the ability to speculate on whether purchasing a stock is viable long-term.
Let’s take a look at how you can use fundamental and technical analysis, to help you in your mission to learn how to pick stocks.
What Elements Make Stocks Valuable?
The value of a stock is calculated by the relationship between the demand and supply of the market in question.
If the demand for a stock is in the high camp - the price will generally move upwards. Therefore, it goes without that that if the demand for a stock is on the low side - the price tends to be lower.
Some investors focus on more modest companies, with the view they have the potential for growth. Others prefer to invest in stocks with secure and robust fundamentals from the get-go.
This leads us nicely onto how you can establish whether stocks are overvalued or undervalued.
Identifying Overvalued and Undervalued Stock
In order to determine whether a stock is overvalued or undervalued, the best place to start is by using both technical and fundamental analysis. Both of which we are going to cover in more detail next.
Using the analysis available at your fingertips is really the only way to get the whole picture of the market you are trading in.
To clarify, researching the value of a stock isn’t an indication that you need to find the cheapest stocks. Instead, you are looking to spot top-notch stocks - which are valued below the fair price of the asset.
The idea is that over time the market value will correct itself - mirroring the true value. This is achieved by electing to go long on an undervalued stock before it returns to its intrinsic share price.
Fundamental Analysis: Top Down v’s Bottom up
There are two routes you can take when embarking on fundamental analysis research - ‘bottom up’ and ‘top down’.
Just in case you haven’t heard of these approaches to fundamental analysis, let us explain further with a little bit about each method.
Top Down Method
Let’s start with the top down approach, which is by far the least time-consuming. This makes it suitable for newbies, or seasoned investors who just want the whole picture - fast.
The top down approach usually entails analyzing things like the gross domestic product (GDP) and economic growth.
In addition to that, and before making a final decision about which company or sector to dedicate your attention to - you might also want to analyze interest rates and monetary policies. Additionally, consider inflation, yields, and bond prices.
Confused about how to even begin analyzing a company's yields? Fear not. We are going to shed some light on how to evaluate a company’s financial performance further down in this How to Pick Stocks Guide.
Bottom up Method
Using this type of analysis doesn’t concentrate on industry fundamentals, nor the conditions of the market entirely. The main focus is to determine how the specific company fairs against the competition.
If this sounds more up your street then you can start your bottom up approach to analysis by looking more at finances.
To give you an idea - you need to be investigating the company’s products, management, and a variety of different financial ratios.
We have covered financial ratios further down this guide, so stick with us.
Will Technical Analysis Help Me Pick Stocks?
In this section, we are going to divulge how to pick stocks by utilizing technical analysis to its full potential.
In a nutshell, your goal is to concentrate on the stock’s movements, and price data available. In other words, patterns and trends that point toward market movements in the future.
Investors identify trends using a variety of technical indicators, so using more than one is your best bet.
To help you decide which strategy might be best for you on the technical analysis side of things, we have put together a list of the most useful tools to consider.
- Relative strength index (RSI) - The RSI is widely used to illustrate market conditions and the momentum of a stock, as well as highlight potentially dangerous price shifts
- Ichimoku cloud - This indicator is all about the resistance and support levels of the asset. The indicator projects price momentum and offers signals to aid you in your decision-making process
- Exponential moving average (EMA) - The EMA monitors important market shifts - assing how legitimate they are
- Moving average (MA) - The MA cuts out the extra ‘noise’ of short-term spikes in the price of a stock - focussing on the direction of a particular price trend
- Moving average convergence divergence (MACD) - The MACD identifies developments in the momentum. This is obtained by taking two different moving averages - and comparing them against each other
- Stochastic oscillator - The stochastic oscillator illustrates the trend and momentum strength of an asset. This is achieved by comparing various price ranges against the closing price of the asset. This is done over a period of time
- Average directional index - This index shows price trend strength and will help you to decide whether a downward or upward trend is expected to continue
- Fibonacci retracement - The Fibonacci retracement identifies the extent to which a market is likely to move against the current price trend
- Bollinger bands - Bollinger bands are helpful for speculating on the long-term price shifts of stocks. This makes it very beneficial for identifying when the asset in question is operating outside of the stock’s usual price level.
- Standard deviation - This technical indicator is handy for calculating the volume of price shifts, making it easier to ascertain how probable it is that volatility will have an effect on the price further down the line.
Fundamental Analysis Vs Technical Analysis: The Lowdown
When it comes to how to pick stocks effectively, both fundamental and technical analysis are important factors. We cannot really say that one is superior to the other - because they are both very different.
Which category of analysis you decide to use is ultimately up to you - or rather, it is contingent on your personal strategy.
Generally speaking, long-term traders and investors tend to opt for the fundamental analysis approach. Whereas people utilizing a short-term strategy typically concentrate on technical analysis.
In spite of that, we still think that you can optimize any investing endeavour by taking advantage of both. This way you are unlikely to miss important intelligence regarding stocks you are invested in financially.
Quantitative and Qualitative Stock Factors
Let’s start by explaining that a ‘quantitative factor’ is the mathematical outcome from a decision that can be measured. To put it more simply - quantitative factors are usually part of financial analysis - the goal being to properly assess a situation.
A ‘qualitative factor’ is the outcome of a choice impossible to measure - such as investors, morals and products.
Let’s give you some examples of each, starting with qualitative factors.
- Financial news - Keeping abreast of the latest news is important when picking stocks. As we’ve said, news and unrest can result in high volatility. Other events to look out for would be economic developments - such as interest rate changes.
- Company news stories - Company news stories such as fraudulent activity, data breaches, and sweatshop conditions can have a huge effect on the value of stocks. For instance, BooHoo shares fell by 19.5% after the sweatshop working conditions scandal broke. Another example is Facebook, whose shares fell by over 7% after news broke of a private data breach.
- Changes in personnel - Things to look out for include shifts in the management structure of the company. In a nutshell, changes in personnel can alter the market's general perception of the business - which in turn will have a direct influence on stock prices.
- Change in earnings - An important part of fundamental analysis is to watch out for the company’s earnings. For example, if the earnings of the company fall, but the cost of the share is not adjusted - this is a really strong indication that the wider market is bullish on the firm.
- Dividends - As we said earlier, dividends are your share of the company’s gains - which are distributed between shareholders. This can also be achieved via an ETF that focuses primarily on dividend-paying stocks.
- Company balance sheet - A company’s balance sheet essentially summarizes its financial situation - covering debts and assets. These balance sheets mirror prospective earnings - which has an effect on the price of a stock.
Ready to dive into the Stock market?
Part 5: How to Pick Stocks - Analyze the Company’s Financial Performance
Having offered plenty of advice on how to pick stocks - we need to mention performance. Another way to aid yourself in making a decision is to check out the finer details of a company’s financial activity- past and present.
By that, we mean to give yourself a clear picture of the company’s debt, in comparison to its shareholder value. Most companies have a little debt, so your job is to assess what is too much.
Below we have listed some of the most helpful ratios you can use when analyzing a company’s financial performance.
P/E Ratio - Price to Earnings Ratio
The price to earnings ratio (P/E) is useful for contrasting the price of two different stocks in a specific sector. This ratio illustrates how much you would need to spend in order to make a dollar in profit.
It’s a great tool for determining whether a company is in the overvalued or undervalued camp. This is achieved by evaluating historical price data and averages.
D/E Ratio - Debt to Equity Ratio
The debt to equity ratio calculates the firm’s assets against its debt. This is going to show you the company’s performance levels in comparison to its rivals.
If the ratio seems on the low side - this can indicate that the majority of the company’s capital comes from its shareholders.
With that said, a ratio being considered either bad or good is entirely dependent on the specific industry. For instance, the real-estate industry regularly utilizes huge loans in order to pay for new endeavours - so you wouldn’t necessarily see a lot of debt as a red flag.
ROE Ratio - Return on Equity
Return on equity is tasked with illustrating, in percentage form, the company’s equity against potential profitability.
By checking the ROE you stand a better chance at deciphering whether a company is creating enough of an income independently - comparative to the investment of shareholders.
PEG Ratio - Price/Earnings to growth
Price/earnings to growth calculates the aforementioned P/E ratio in comparison to the yearly earnings per share (EPS).
If you are still making your mind up about which stocks you might like - the PEG ratio should definitely be part of your investment strategy. PEG is great for showing you a stock's true and fair valuation.
P/B Ratio - Price to book
The price to book ratio calculates the company’s book price against the present market value.
If you see a ratio higher in value than 1 - this points towards shares that are considered to be overvalued. Again, you need to take into account which particular sector you are dealing with.
The current ratio references whether or not the company’s debt can be cared for by assets available.
The stock price and the current ratio are connected. If the current ratio is on the low side - the chances are the stock value will continue to fall.
Is the Company Stable?
As you are probably aware by now, there is more than one way to use analysis when learning how to pick stocks. Knowing whether or not a company seems stable can only help guide you in picking the right stocks.
One of the best ways to assess the stability of a company is to look at historic price actions to wider stock market failures. You should be looking at whether the company recovered, and if so how quickly and easily. In doing so, you are comparing the stock price then and now - for a full picture.
Part 6: How to Pick Stocks - 4 Tips for Getting Started Today!
In the final section of our How to Pick Stocks Guide, we have outlined four handy tips that will ensure you get your share dealing career off on the right foot!
1. Find a Good Broker to Sign up With
Ideally, you need to look for a broker holding a license from a regulatory body. The reason you are better to stick with licensed brokers is that they are legally obliged to follow rules such as client fund segregation - keeping your money from that of the company’s capital.
Not only that, but all licensed trading platforms must abide by ‘know your customer’ (KYC) rules - preventing money laundering, terrorist funding, and fraud, etc. You must also consider whether the platform is able to offer the stocks you are interested in trading/investing in.
And of course, make sure you are using a broker that offers low fees. eToro, for example, allows you to buy over 1,700 shares in a 100% commission-free manner. This ensures that your profits are not eaten away by unavoidable brokerage fees.
eToro – Top Stock Broker in the UK (0% Commission and No Stamp Duty)
eToro have proven themselves trustworthy within the stock market industry over many years – we recommend you try them out.
Your capital is at risk. Other fees may apply
2. Learn the ins and outs of the Market
Learning the ins and outs of stocks doesn’t have to be an expensive lesson in ‘what not to do’. Instead, there is a plethora of educational material on our website that will teach you the ropes from the comfort of your own home - before risking your capital.
In addition to the material we offer here at Trading Education, it’s also worth grabbing yourself a relevant book on how to pick stocks.
Some of the best books that we like include:
- Stock Investing For Dummies - by Paul Mladjenovic
- The Intelligent InvestorThe Definitive Book on Value Investing. A Book of Practical Counsel - by Benjamin Graham and Jason Zweig
- Winning on Wall Street - by Martin Zweig
- When to Sell: Inside Strategies for Stock-Market Profits - by Justin Mamis
- Irrational Exuberance: 3rd edition Revised and Expanded Third Edition - by Robert J. Shiller
- How to Make Money in Stocks - by William O’Neil
In terms of news, many investors turn to Google Finance, CBS MoneyWatch, and Yahoo Finance. For more in-depth financial news you should check out both Bloomberg and the Wall Street Journal.
As well as the wide variety of books, courses and educational videos available you can try out a demo account for some free practice.
3. Get a Grip on Fundamental and Technical Analysis
We have covered fundamental and technical analysis in detail, so you understand how helpful it is when it comes to picking stocks - as well as when to hold on or let go.
Therefore, it is crucial that you at least have a basic understanding of both forms of analysis. It will greatly improve your chances of picking the best stocks and timing the market correctly.
The best investors study the company’s financial performance in detail - covering various ratios that illustrate growth, market value, and stability.
As we’ve said, stock investors use charts and tools to try and seek out trading ranges and trends. If you need a recap of the most popular technical analysis tools, take a stroll further up this page.
4. Create a Risk Management Strategy
Another top tip when learning how to pick stocks is to create a risk management strategy to stick to. This is because the value of stocks changes on a regular basis, due to outside influences. As such, the stock scene comes with a certain level of risk attached.
When picking your own shares, it will be apparent that as well as good stocks there are the bad and the ugly too.
That is to say, there are some companies that are being flushed out by the competition. Then you have firms that are struggling under new management and those using prehistoric business models that just don’t work in this day and age.
With this in mind, the most effective risk management strategy is to diversify as much as you can. Your portfolio should include heaps of stocks from a variety of markets and sectors. Take things to the next level by buying stocks from several exchanges and regions.
Ready to dive into the Stock market?
How to Pick Stocks: The Full Conclusion
There you have it. Picking stocks shouldn’t just be a stab in the dark affair - after all, there is money involved.
The only way to know if a stock is a viable investment for you is to do your homework on the company in question.
There are heaps of different ways in which you can educate yourself on the ins and outs of a stock. A good place to start is to evaluate the company’s overall financial performance and stability.
This means looking into the company’s accounts, debt management, and various other ratios for a full picture of the health of its stock. All in all, just make sure that you avoid being overexposed to one or two stocks. Instead, build a highly diversified portfolio to mitigate your long-term risk.
How can I pick the best stocks?
The best possible start you can give yourself when picking the stocks is to do your homework on the company. For instance, it can be helpful to look at financial performance and historic data, which will show you how they have dealt with ups and downs in the past.
What is considered to be a diverse stock portfolio?
A diverse stock portfolio is, in essence, having a variety of different stocks in your investment basket - for maximum exposure to the markets. For example, you might have 100 stocks from lots of different sectors, markets, and countries.
What happens if I can’t afford a full share?
Many investors now opt to invest in Exchange Traded Funds (ETFs). ETFs will track the S&P 500 index for example, which contains 505 stocks from various companies. This way you can invest in many big stocks- via a single trade. Or, you can use an online broker like eToro which supports fractional shares. This means that you can buy a ‘fraction’ of a stock from just $50.
What is the best stock to pick?
There is no hard and fast answer to this question - as it all depends on your own financial goals and appetite for risk. If you are really struggling to pick individual shares to buy, we would suggest opting for an index fund.
Is it important to opt for stocks that pay dividends?
No. Choosing stocks with dividends doesn’t necessarily mean more gains. Some of the biggest blue-chip companies in the world do not pay a single cent in dividends - using that money to grow the business instead. Alternatively, you could choose a relevant ETF - giving you access to hundreds if not thousands of dividend-paying stocks.