Looking to invest in stocks for the first time? Make sure to follow these tips when choosing where to invest your money.
Investing in stocks can feel intimidating the first time around. There’s definitely a level of risk involved with the stock market that should make investors a little nervous.
However, owning stocks should also be exciting because there’s definitely a chance to make money in the market.
Picking a stock to own is a difficult step to accomplish, especially when there’s not much money to invest with. The main thing to consider is that a stock should be a long-term investment. We’re talking at least two to five years at minimum.
There are a few simple tips I followed when choosing the stocks I invested in, and they’ve played out pretty well. Here’s how to pick out the best stocks to invest in:
#1: Analyze the last three-five years of the company
A company will perform well in the stock market if they are performing well as a company. That means growth in sales, growth in profitability, and the capacity to keep growing over a long period of time.
Every company in the US stock market has their financial information available online in the form of a 10-K or 10-Q. The 10-K is for a company’s fiscal year performance, while the 10-Q is for a specific quarter of the fiscal year.
By taking a look at these filings, people can see how much a company made in revenue, how much they spent, how much debt they have, among so many other things. Every filing offers at least a year over year comparison for the company.
Aside from peeping the financials, it’s a good idea to read what the company’s management had to say about their performance for the year. All of that is also on these filings.
By seeing what the trends have been in a company over the past few years, one can get an idea of what may lie ahead. Check out a public company’s filings on the SEC website on the company’s investor relations page.
#2: Analyze the industry
The best performing stocks will belong to the best performing industry. Whether it’s technology, healthcare, media, or whatever, almost every stock in the strongest industry will benefit from each other when the industry has good buzz around it.
Within every industry, it is good to understand what companies are leading the pack. In addition, it is also good to understand by how much those companies are leading their industry.
There are tons of reports online covering every industry and the biggest players in those industries. A quick Google search will help get the job done.
#3: Listen to stock market podcasts
There are plenty of podcasts online that cover news related to the stock market. These podcasts are highly informative and talk about so many companies one may have never heard of.
Furthermore, these podcasts cover what is going on in the industry. They even talk about what analysts think about the company’s future. In other words, they do what I recommended doing in the first two tips.
A personal favorite of mine is CNBC’s Squawk on the Street. It is a bit lengthy, but the episodes cover so much ground and talk about everything. There is a lot to learn from this podcast.
#4: Consider the P/E ratio
What the heck is a P/E ratio? Essentially, it is a measure of how much greater the stock price of a company is trading at in relation to their earnings per share.
A high ratio can imply the company is being overvalued. On the other hand, a low ratio can mean the company is being undervalued.
It is hard to say whether a P/E ratio is high or low unless a company is being compared to another company in the same industry. A peer comparison is a good way of measuring how a company is performing as well.
Investing in a low P/E ratio stock can be a good move if analysts around the market believe a company is being undervalued. Chances are that senior management in the company will take action to increase the share price. However, if analysts think the valuation of a company is accurate, it might not be a good choice to invest in that company.
#5: Look for dividends
Worse comes to worse, the money invested in a stock can be lost. To mitigate this risk, it can be a good idea to invest in a stock that pays dividends.
A dividend is a payment a company makes every quarter to their shareholders. The payments are announced as an annual percentage yield. The dividend yield is in relation to the stock price.
For example, if a company pays a dividend yield of 5% and its stock price is $40, the dividend would be:
$40 * 5% = $2 per share
Of course, companies aren’t going to pay such a high yield if their stock price is high. The average yield can be between 0.5%-2% for a popular stock.
The highest paying dividends are usually stocks that are low in price. Usually, a company whose price is around $10-$30 a share consistently will pay 5% or higher dividend yields.
Consequently, if someone were to do the math, the amount earned in dividends can provide a gain on the investment alone after a few years. It’s especially true if the price remains the same relatively all the time.
Better yet, if the stock goes even slightly up, the dividends and the increase in price can provide a juicy return.
All these tips seem like a lot, but there’s definitely more ways to pick stocks. These are some of the more logical ways and easiest to wrap one’s head around. Whatever stock you end up choosing, remember it is a long-term investment.
