How to pick stocks: basic best practices for new investors

So you finally decided to start investing. You already know that low P/E ratios are usually better than high P/E ratios. Companies with large amounts of cash on their balance sheets are better than companies with heavy debts, and you should always use analysts’ recommendations with a grain of salt. You know the basic rule of smart investors: The investment portfolio should be diversified across multiple sectors.

This almost covers the basics, regardless of whether you have dabbled in more complex technical analysis concepts. You are ready to pick stocks.

But wait! There are tens of thousands of stocks to choose from. How do you choose a few stocks worth buying? No matter what recommendations some experts make, it is impossible to comb through every balance sheet to identify companies with good net debt status and rising net profit margins.

Key points

  • Decide what you want your portfolio to achieve and stick to it.
  • Choose an industry that interests you and explore the news and trends that drive it every day.
  • Identify the companies that lead the industry and return the numbers to zero.

If you use a stock screener, it is easy to make mistakes. Trailing by institutional investors is an option, but you should know that they tend to rely on safe blue chip stocks that may or may not provide the best returns.

How to choose stocks

Smart stock pickers have three things in common:

  • They decide in advance what they want their portfolio to achieve, and they are determined to stick to it.
  • They keep abreast of the daily news, trends, and events that drive economic development, and each of them.
  • They use these goals and knowledge to make decisions about buying and selling stocks.

Determine your goal

The first step in choosing an investment is to determine the purpose of your investment portfolio. Everyone’s purpose of investing is to make money, but investors may focus on supplementing income, preserving wealth, or capital appreciation during retirement.

Each of these goals requires very different strategies.

Thoughtful investors have a “story” to explain every decision to buy stocks

Three types of investors

Income-oriented investors focus on buying (and holding) stocks in companies that pay good dividends on a regular basis. In industries such as utilities, these companies are often stable but low-growth companies. Other options include high-rated bonds, real estate investment trusts (REITs) and master limited partnerships.

Investors who aim to preserve wealth have a low tolerance for risk, whether it is natural or due to their circumstances. They are more willing to invest in stable blue chip companies. They may focus on consumer staples, that is, companies that perform well in good times and bad times. They do not pursue an initial public offering (IPO).

Investors looking for capital appreciation are looking for company stocks in the best early growth years. They are willing to take a higher degree of risk in order to obtain huge benefits.

Diversified investment portfolio

Any of these types of investors may use a combination of the above strategies. In fact, this is one of the main motivations for diversification. Conservative investors can use a small portion of their portfolio for growth stocks. More aggressive investors should assign a percentage to stable blue chip stocks to offset any losses.

Determining which category you fall into is the easy part. Figuring out which stocks to choose becomes complicated.

Keep your eyes open

Keeping up with market news and opinions is crucial. Reading financial news and keeping up with your opinions An industry blog written by an interested writer is a kind of passive research. News articles or blog articles can form the basis of investment essays.

The underlying argument can be a common sense observation. For example, you may notice that emerging market countries are producing new middle classes, which are made up of people who need a wider variety of consumer products. Therefore, the demand for certain products and commodities will surge.

The “story” behind stock picking

Furthermore, investors can infer that as the demand for the product increases, some manufacturers of the product will prosper.

This type of basic analysis forms the “story” behind the investment, which proves the rationality of buying stocks.

At the same time, it is also important to criticize one’s own hypotheses and theories. You may like doughnuts and express trains, but that doesn’t mean that the newly rich in Southeast Asia also yell at them.

After conducting this form of qualitative research, once you are satisfied and convinced with the general arguments, company press releases and investor presentation reports are a good place to continue your analysis.

Find a company

The next stage of the stock selection process involves identifying companies. There are three simple ways to do it:

  1. Find exchange-traded funds (ETFs) that track the performance of industries you are interested in, and view the stocks they invest in. This is as simple as searching for “Industry X ETF”. The official ETF page will disclose the maximum holdings of the fund.
  2. Use filters to screen stocks based on specific criteria, such as department and industry. Filters provide users with other features, such as the ability to classify companies based on market capitalization, dividend yield, and other useful investment indicators.
  3. Search for news and reviews of companies in your investment field in the blogosphere, stock analysis articles, and financial news releases. Remember to be critical of everything you read and analyze both sides of the argument.

These three methods are by no means the only way to choose a company, but they do provide an easy starting point. Each strategy that investors should consider also has obvious advantages and disadvantages.

Seeking expert advice through news sources is time-consuming, but it can produce results. It will deepen your understanding of the fundamentals of the industry. It may also remind you of interesting small companies that do not appear in the filter or ETF holdings.

Listen to company presentation

Once you are convinced that the industry you are interested in is a reliable investment, and you are familiar with the major players, it is time to turn your attention to investor introductions. They are not as comprehensive as financial statements, but provide a general overview of how the company makes money, and are easier to absorb than 10-Q and 10-K reports.

These reports will also contain forward-looking information about the expected direction of the company and its industry. Browsing company websites and presentations can help you optimize your search.

This process involves a more in-depth review of a particular company to see if it is likely to outperform competitors in the industry.

Next step

At the end of your research process, you may only have one investment prospect or a list of ten or more companies left.

Or you might think that this industry is not for you. It’s ok. All these studies may prevent you from making the wrong investment.

Knowing when to refuse is an important aspect of the art of stock picking. You may be ready to pull the trigger, or you can perform in-depth financial statement analysis like a financial industry expert.


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