Many people with a reasonable amount of disposable income consider investing in the stock market, and for most, the first stumbling block is which stock to choose. There are so many different possibilities that a lot of people give up at this point. After all, making the right choice at this stage decides whether you will make or lose money. With no one to guide you, the possibility of choosing wrongly is too frightening, so many people give up and leave their money in the bank where at least it will be safe, if not accumulating much more than a negligible amount of interest.
Of course, no one can guarantee which stocks will make money and which will fail. If they could, we’d all be millionaires. But it is possible to make an informed decision and, perhaps most importantly, to pick the stock that’s right for you. Remember that as an investor, you’ll be in it for the long haul, so you need to work out what your goals are and whether you’ll be able to follow and understand your stock’s progress over many years to come.
Determine your goals
Ask yourself what you are investing for. Are you hoping to cash in relatively quickly, hopefully at a decent profit, or is this a long-term investment that will mature in a few decades time? Do you want to generate a regular steady income, through dividends and distributions, or do you want to accumulate capital and leave it untouched until the need arises?
If you want regular income, look for stocks with good dividend yields, such as eToro dividends, but make sure that the company has the cash flow and earnings to support those dividends. Solid, well-established but low-growth companies in sectors like utilities will generally pay out regular, reliable dividends. Your stocks won’t massively increase in value over your lifetime, but neither are they likely to become worthless overnight.
Different options
Low-risk companies are also best for long-term wealth accumulation. Go for blue-chip corporations and consumer staples that will be in demand even in an economic downturn. Avoid luxury goods and over-hyped innovations. On the other hand, if you hope to increase your capital considerably, you might want to take a risk on a young company with potential for growth.
As well as being spread over various sectors, a healthy diversified portfolio may contain stock from all these categories. While it’s inadvisable to put all your eggs in one basket, the exact balance of investments must depend on your overall intentions and requirements.
Go with what you know
Now that you know why you are buying stock, the next step is to decide which industry sector you want to invest in. Here, the answer is to go with what you know. If you don’t really understand what a company does, how will you know whether they’re doing well or badly? Look for industries that you are genuinely interested in, or that make items or provide services that impact your day-to-day life. You’ll be spending a lot of time researching this sector, and if it seems boring or irrelevant, then a lot of important details will go over your head.
At the same time, you should also consider the long-term prospects of the industry in question. Is it likely to be threatened by technological advances, changes in social attitudes or new laws relating to health and safety, pollution control etc.? Noone knows what tomorrow may bring, but future-proofing your investments as much as possible is always a good idea.
Best in field
Now you’ve narrowed your selection down to a particular industry, it’s time to pick the best company in that field. Here, there’s no substitute for serious research. Get digging into company reports and press releases, financial news, expert opinions, historical share prices and market performance history. Look out for stock analysis articles and commentary. You want to find a company that has a strong competitive advantage, but where the stock isn’t overpriced and still has potential for growth.
Look at a company’s P/E ratio. This stands for price to earnings and is a way of determining whether the stock is fairly priced. A low P/E ratio is better than a high one. Examine the company’s balance sheet and avoid businesses that are carrying a lot of debt, even if they seem to be doing well.
As mentioned before, a healthy portfolio should be diversified across multiple sectors, so you should repeat this process several times. Decide what you want your portfolio to achieve, then pick contrasting industries that interest you. Explore the trends that drive them and identify industry-leading firms before examining their underlying worth. Soon you should have a stock portfolio of which you can be proud.
