Key to making money with shares. Lesson 1. How to pick stocks

19-03-2021

How to trade stocks? What are the best stocks of U.S. companies to buy? How do you choose the stocks of the start-ups? The answers to all these questions boil down to one thing. And that is ANALYSIS.

Figures are essentially the first thing we see when choosing stocks or unit investment trust (UIT). Aside from the basic information about the asset, we learn about its price, history, volatility, and many other important details. These indicators are expressed as figures. It’s important to keep in mind that by acquiring them we basically become part owners of the company in question.

So, you have to consider several crucial factors before you actually take that step.

The first lesson covering the stock trading for the newbies will be focusing on the information you should take into account when investing your money in a particular company.

Contents:

1. Your financial goals
2. Portfolio make-up: Risk
3. Portfolio make-up: Diversification
4. Dollar-cost averaging (DCA)
5. Corporate leadership
6. Business model and company history
7. Price history and volatility
8. Ratios

Your financial goals

Before you proceed to invest, you should figure out what your overall financial goals are. Are you doing that to secure financial stability after you retire, buy a house or is there any other specific goal you have in mind? How soon would you like to get access to these funds if necessary?

This and many other factors will be affecting your financial plan. The majority of investors opt for a long-term approach which implies that stocks will be held for a long time. This is why it’s likely that you will be needing stocks that will generate stable returns for many years and not just a month. Generally speaking, this is a rule of thumb when it comes to investing in stocks. However, make sure that your investment technique meets your specific needs and not someone else’s.

Portfolio make-up: Risk

How many conservative and risky investments do you have? Which balance would you like to achieve as far as your portfolio goes? Before investing in a particular company, think about how well it will fit your overall risk management system. This is something you must always pay close attention to.

Stock trading for beginners: Portfolio diversification

Portfolio make-up: Diversification

If you are a newbie who is only dipping the toes in stock trading, you need to decide whether you are more comfortable with particular stocks or indices. Keep in mind that diversification is a key to a successful portfolio. Investors who can't be bothered sorting through many different stocks typically go with participation in the S&P 500 index fund. It’s definitely a much better alternative than keeping all of your money in a savings account.

With that said, if you put a little more effort into it, you can lower high risks considerably by distributing your money between different sectors and types of assets. Owning several asset classes can help protect your portfolio from systemic risks much more effectively.

Dollar-cost averaging (DCA)

In its investment guide, the Securities and Exchange Commission (SEC) defines dollar-cost averaging as “investing a set dollar amount in the same investment at fixed intervals over time." Basically what this means is that instead of investing all your money all at once or one time only, you buy stocks at certain intervals.

The purpose of dollar-cost averaging is to use vitality. Averaging is applied primarily in terms of stocks with moderate and high volatility.

Corporate leadership

Before investing your money, you need to check out the person the company is headed by. What is their experience in the given sector? How long have they been running the company? Strong leadership is an essential factor to consider if you expect long-term stability and growth. As an investor, you cannot afford to miss a single red flag.

Business model and company history

Corporate history goes beyond just figures. However, companies with a long-standing experience typically demonstrate more stable growth in contrast to newly-emerged players.

Aside from that, it’s important to keep in mind that positive performance in the past cannot guarantee that the company will generate similar profits in the future. With that said, it means that you’re dealing with a company that knows what it is doing and has already addressed certain drawbacks of the business model. In other cases, a company may still be unable to move forward and keep up with the market despite having a solid corporate history.

Price history and volatility

Stock trading—as well as education—goes hand in hand with figures as they have the utmost importance. The fact that they round up our list doesn’t mean that you should neglect the information about the longevity of the company's operation.

Check out the price history of the selected company. How expensive is it? Will you be able to buy a sufficient amount of assets? Keep in mind that when it comes to stocks, your profit originates from interest. If you invest $100 in a stock to the value of $50 and it goes up by one pip, you will make $2.

If you invest the same amount of money in a stock worth only $5 and it goes up in value by one pip, you will earn $20. With that said, this does not mean that you should buy cheap stocks only. There is a good reason why securities are more expensive.

Also, while you are at it, pay attention to the company’s volatility. Make sure that the price history of the given stock complies with your risk threshold. If the price was everywhere, this can be a great investment option for speculators. With that said, don’t forget to preserve the money you cannot afford to lose.


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Ratios

Financial ratios are powerful tools when it comes to making investments. Keep in mind that they are relative and typically come in handy when comparing same-sector companies. At the same time, they would not be particularly helpful when comparing the ratios of, let’s say, a company that operates in the automotive industry and the one that belongs to the banking sector.

Ratios are the figures that no trader can do without. In the next articles, we are going to explore each indicator in more detail. Our next stock trading lesson is dedicated to the price-to-earnings (P/E) ratio. We shall discuss how it forms, how to analyze it, as well as what aspects to pay close attention to. All of this will obviously be supported by illustrative examples.


Key to making money with shares. Lesson 2. P/E Ratio


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