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How to Pick Stocks to Invest in – Advice for New Investors

How to Pick Stocks

How to Pick Stocks to Invest in – Advice for New Investors.

Before finally deciding to invest in a stock, you should first know how to pick a stock. Thus doing some homework on it is essential to make the right decision. While you are investing in a stock, your aim should be to find its good value, especially when you will hold the stock for a long time. At the very beginning, don’t put all your faith in a company, whether it’s reputed or not. Do thorough research on it and then go with your decision. However, in this article, we describe the detailed guide for the new investors regarding how to pick stocks.

Are you looking for an answer regarding how to pick a good stock? The answer depends on how well you do thorough research on it. A good research process consists of several steps, including reviewing the fundamental of stocks, monitoring the viability of the stock, etc. After checking all these, decide whether you should invest in it or it deserves a place in your investment portfolio or not.

Investing in stock or buying it is not a casual purchase, just like buying anything from the market. But, by investing in it, you will be the company part’s owner. So don’t look for a shortcut way to invest in any stock, rather do proper analysis and research on it. Here we are going to describe the 5 steps to pick a stock. Let’s dive into it.

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1. Set the Investment Goals

Not every investor invests in the stock market with the same goal. Everyone has different goals and perspectives of their own. For example, the new investor may research how to pick a stock that will suddenly go up and increase the profit. In contrast, the professional investor may analyze how to pick stocks for the long term to create sustainable longer-term profit. Thus, everyone has their motive of investment.

Now you have to decide your goal before picking out stock. If you are a new investor, you may want to develop the portfolio as much as possible. But if you are an old trader, your probable aim could be capital preservation and holding the asset as security in the future. On the other hand, generating regular income in distributions and dividends can be some investors’ motto.

Now take some time to decide the best investment motto that perfectly fits your investment portfolio. There are no rules of thumb available here, which will tell you what your stock selection should be. You have to decide how much growth you want to establish in your portfolio. However, some of the general goals setting criteria are the following:

  • Investors whose motto is to generate income from their investment will pick out a stock that ensures good dividend yields. Moreover, they will also eagerly pick one that will ensure regular earning and cash flow to support the dividends.
  • If any trader looks for future growth, he will undoubtedly choose to pick out the stock from the younger or new companies? They will choose one that will ensure good earnings and stable revenue growth over time.
  • However, if capital preservation is your area of interest, you will surely go the opposite direction. Usually, the investors with this motive decide to invest in a company producing predictable and steady profits over the years.


2. Choose Companies That You Are Interested In

You become the company’s partial owner by buying stock from it. You will surely fail by investing if you don’t have an interest in that company or don’t understand their business. Would you invest in a company whose business is unclear to you or don’t understand it? If you fail to understand them, how would you decide whether they are doing great job management or not?

In the stock market, you will find the available companies to buy stocks. But take a moment to decide which one is the best company among them. Of course, you should look for the smart stock to invest not casual stocks. Also, you can look for those companies which impose an indirect impact on you. For example, many businesses avoid direct consumer dealing, and you can also pick out their stocks.

To understand how a company has an indirect impact on you, consider some examples. Such as, usually you go to the pharmacy to buy medicine but do you have any idea who is making it? Or what equipment does the company use in making drugs?

On the other hand, when you decide to get new parts for your car, do you know from where they produced off? Or who are the makers of those parts? Usually, the answers to all these questions would be no. You don’t know any of them or about the companies, but they leave an important impact on your life. Thus you can choose such companies to pick stocks.


3. Check the Company’s Competitive Advantages

Now, as you have several companies and their competitors on your list, you may feel confused about how to pick a stock and from which company. Don’t worry, now you need to narrow down your list. And remove that one which offers you less advantage. So now the question is how will you make the shortlist and on which basis you will remove the companies?

The answer is to pick a stock from a company with a competitive advantage over a sustainable period. According to Warren Buffett, the sustainable advantage is an important criterion to consider, and it’s called a moat.
While investing in a stock, you should focus on its key assessing factor. The major determining factor is not how much the company generates profit, grows over time, or affects society. Rather the key assessing factor is how much the company is offering competitive advantages over time. Again the advantage’s durability is another important factor to consider.

Usually, the investors think about picking good stocks. But, they should consider the company’s competitive advantage as one of the most important factors. The investors certainly received rewards from those products, stocks, or services which offer greater sustainable moats. However, the company can have strong competitive advantages over the competitors from the following sources:

  • Switching costs
  • Scale
  • Intellectual property
  • Unique brands
  • Network effect etc.


4. Determine the Stock’s Fair Price

So, are you done with narrowing down those companies offering greater competitive advantages over the competitors? If yes, now you should focus on the stock’s fair prices. In various ways, you can determine the stock’s fair prices. And finding the best price is essential while deciding how to pick stocks. Here are a few ways:

  • Price-to-Earnings Ratio: To get the PE ratio, you need to divide its current share price by its past year’s earnings per share. If the company’s PE ratio goes below the historical average, it creates a good price opportunity for the investors to invest.
  • Discounted Cash Flow Modeling: This method is all about developing a future earnings model based on the profit margin, revenue growth, and other expenses projections.
  • Price-to-Sales Ratio: This PS ratio is handy for unstable earnings-producing stocks that don’t yield much profit. Again, a considerable guide could be the historical averages price in this case.
  • Dividend Yield: If you are going to pick a stock emphasizing income, you should consider dividend yield as another important factor. The stock’s dividend yield is above average, which means its good price is going on. However, consciously avoid the yield trap. Before investing, check whether the dividend is sustainable or unsustainable.


5. Buy a Stock with Safety Margin

Hopefully, you read the above 4 steps to decide how to pick a stock. The last step of this guide of how to pick stocks is to buy the stock with a safety margin. The safety margin means buying the company’s stock at a lower price than your fair price estimate.

Considering the safety margin is extremely important because if you do the wrong calculation, fair price valuation will save you from greater loss. Its another crucial success key in stock market investment. The strong outlook stock with greater stable earnings requires a wide safety margin. So always, you should buy stocks at 10% less than your targeted fixed price. And hopefully, it would be fine.

In the case of less-predictable earnings growth stocks, the investors should have a wider safety margin. For less stable stock, aim for a 15%-30% profit margin depending on how strong your valuation is.


Bottom Line

Now, if a new investor properly follows the above step-by-step guide of how to pick a stock, they will surely get some winning stock investments. Again, those new investors who are looking for a guide to how to pick stocks for day trading can also follow the above suggestions.

Hasna hena flower.