Have you decided you want to invest in stocks and are not sure where to begin?
There are a number of different options when investing, some people choose to go for ETFs which take away the work of finding individual stocks and offer diversified portfolios with low or no fees, others may decide to invest in personal investment plans, but a lot decide to build their own portfolios. If you’ve chosen to do it on your own and pick your own stock then there are a number of different steps to take in order to decide which ones to pick, if they may be worth undervalued and worth investing your hard-earned money in.
Initial research steps
The first steps in deciding what companies to invest in are quite complicated as you have thousands of options across many stock markets and in many different countries. It might be beneficial to begin brainstorming some ideas, this may include writing down on a sheet of paper a number of different sectors you think may do well in the long run and researching what companies are in that sector, listing them and with some research, you can often uncover companies you may never have heard of, these can present opportunities if they’re new and have good growth potential, which you will learn to research in the next steps.
It’s important to understand the basics of a company before even thinking of buying stocks in them, does the company consistently generate a profit? Are they showing clear signs of growth each year? Do they offer services that will be required in the long term? Are they a popular store that provides customers with quality goods that will keep returning customers?
If you’re conscious about the environment or how ethical the company might be then this is the stage to investigate, you will be able to research how environmentally conscious the company is, whether or not they source their products from companies that offer fair wages, if it does not meet the criteria you set then you can rule it in or out at this stage.
Once you’ve established the companies that may appeal to you then you should add them to your list or spreadsheet.
Buying stocks for the long term
Instead of picking stocks that you are expecting to only do good in the short term take a look at stocks that you think will do well long term, have been shown to clearly adapt to changes in the market, and have a long record for growth. Decide what companies provide products or services that will be required regardless of technology growth and automation or companies that may provide trend items, which could very easily go out of fashion.
Try and find companies that have shown good growth for an extended period of time, companies that pay a consistent dividend are often a great place to start, this shows that they are investor conscious and often share their profits right back to the investor, to view a great up to date list of dividends along with more information on them you can visit Market Beats website which can be a useful resource.
Check out the company’s price-to-earnings ratio
A company’s price-to-earnings ratio is a great way to determine whether or not a company is valued fairly and if it could be undervalued or overvalued. A P/E radio is basically a companies stock price (P) divided by its earnings per share (E), this measure will change throughout the year as the share price changes and as the earnings differ. What the P/E offers is a basic measure of what investors are willing to pay for each dollar of the stock’s earnings. So if the result is £5 that means investors will pay £5 for each £1 in earnings.
To find out the P/E for a company you can go to Yahoo Finance type in the stock you’re looking for and in Summary it will display the current P/E ratio from the latest earning report and based on the latest share price. You can add this to your spreadsheet with the companies you narrowed down in the initial research stage. Some companies may display no P/E, this can be as a result of it posting no profit for that year or not posting earnings at all.
A company with a high P/E vs a company with a low P/E, some
Some companies will post a very high P/E, their earnings may not seem great but this shows that investors have very high expectations for its performance in the long run and envision better growth and results in the future. If a company posts a low P/E this does not necessarily mean it is a bad company to own but that it is at present undervalued or that it is doing a lot better compared to its past performance.
Some people would prefer to go for a company with lower P/E if it meets all their other long-term growth criteria as this could be an opportunity for it to do much better in the future. A higher P/E may be one that puts some people off as they could feel its valuation is too high and its price may be overinflated.
View a company’s risk by it’s Beta measure
A companies beta score will give you an idea of the level of its volatility, it will display the level of volatility measured against a major market, usually the one that it is found in. If a company’s performance over a 5 year period has differed greatly from the market that it is featured in then it has a high beta score.
A beta score above 1 is usually more volatile, this means the price has moved against the general trend of the market by quite a bit, if it is lower than 1 if will have performed less volatile in comparison to the rest of the market. A stock with a high beta does not necessarily make it a bad stock however it just indicates the presence of high volatility. This could offer great opportunities for short-term returns, however, this also indicates that there is significantly more risk and could result in greater losses for your portfolio. Stocks with low beta scores have generally underperformed the market, however present you with lower risks, and can offer you a good balance in your portfolio, if they provide good dividends as well, they can be a safe bet.
To find out what a company’s Beta score is you can visit Yahoo Finance, the same place you checked the P/E and looking for Beta in the summary, add this to your spreadsheet with your selected stocks.
Read the charts and look for patterns
When looking at individual stocks you can view the past long-term trend to try and paint a picture of how the stock has been performing, you must always remember though that past performance and trends are by no means an indicator of future performance and should only be used as a loose guide. If you’re new to stock trading it is best to stay clear from this if you’re not sure, there are great study guides out there that will help you identify trends.
If a stock is doing very well it could be on its way for a breather and you may be able to set yourself entry points based on this, so long as its long-term prospects are good. If however, the stock is on its way down and appears to be underperforming, assuming you have checked there are no fundamental reasons behind the dip and you feel based on all other information that it has a solid chance then this could provide you with a good buying opportunity.
Look for stocks with high dividends
Just like we touched on in buying stocks for the long term, buying a stock with consistent and high dividends can prove to be a great buy, providing you with a solid income. There are many companies offering yearly dividend yields of over 5%, sometimes these companies have stable share prices and aren’t expected to explode however if they’re a good company with good prospects this could provide a rate of return at 5% a year assuming a stable share price, this is much greater than what you can earn at the bank.
There is a list of stocks that have provided a growing dividend yield for at least 25 years, this means that regardless of how the market has performed and during downturns, the company has consistently increased its dividend payout, the list is called the Dividend Aristocrat Index. Stocks that are part of the Dividend Aristocrat index are generally strong and could be good for a long-term pick. You can view a list of the top 50 Dividend Aristocrat stocks on Market Beat.
Buying stocks isn’t an overnight thing, it can take days, weeks, or even years of research and learning, there are so many ups and downs along the way and you should always be prepared to lose money, you’re not likely to get it right all the time, but as long as you learn and grow from your trading that is most important. If you’re only looking at buying 1 stock or a small amount you should be ready for big swings, every company can face bad news at any point so unexpected dips can of course happen, ensure you’re prepared for this. A well balanced diversified portfolio is the best way to beat major swings in your investments, a good mix of low and high-risk stocks, across many sectors will help protect your portfolio
If you’re not very comfortable choosing your own stocks then looking into Exchange-traded funds is a great option, there are often ETFs for almost all sectors, even breaking them down into smaller niches, these are a selection of pre-selected stocks, diversified and are managed by fund managers who will look at stock performance as part of their day job.
Ensure you do proper research using as many sources as possible before buying stocks. Be wary of news articles that are pushing individual stocks or telling you to buy, there are often motives for this – sometimes to drive the price up for their own gain, so always do your own research!