How to Pick Stocks: 8 Things You Should Know

How to Pick Stocks: 8 Things You Should Know

You can’t take investments lightly. After all, it’s a matter involving a lot of money. A particularly lucrative venture is investing in stocks.

Stock market investment is like mining diamonds. You might hit the jackpot or get stuck with coal. Whether you will make a ton of money or go broke depends on how and when you pick your stocks.

Professional stock traders are experts at picking a stock. A successful stock trader always knows which stocks to invest in and when.

They can “smell” successful ventures from miles away! How do the pros do it? To pick stocks like a pro, you have to understand the tricks of the trade. Here are eight points to consider before you pick stocks.

  • Do Your Research

Never underestimate the importance of doing your homework. People often hear that a company is doing well and decide to invest in it. Listening to friends, family, and coworkers might lead to success. But, it is often the reason why people lose their money. Word of mouth can be deceptive.

You have to understand all the intricate, profit-related details of a company before investing in it. Do your research and figure out how the company works, its current performance, and future growth.

Understand how the company has been performing in the market. If you see signs of possible growth then only it will be advisable to make your investment. StocksReviewed.com can help you figure out which stocks are worth investing in.

  • Don’t Go All In

If you find a promising company that shows signs of exponential growth, you might want to invest all your funds on it. This may be a very risky decision.

Every company, even a successful one, may not end up becoming the next Google or Amazon. If you invest all your money in one company and it faces loss, you will also lose your entire investment.

Do not put “all your eggs in the same basket”. Spread out your investments and buy stocks from different companies. It is better to spread out to different sectors so that if one faces downtime, you can earn from another.

Don’t gamble with your stock market investments. Make careful decisions to ensure the profitability of your investment.

  • Position In The Industry

When you consider investing in a company’s stocks, you have to take a deeper dive. A comparison of its strength to its peers is a must.

Can it stand on its own against competition? What makes it better than its peers? Why should you invest in it and not in other similar companies?

Make a list of all the pros and cons if you must. All companies have some drawbacks, but it’s fine as long as the pros outweigh the cons.

The industry will tell you a lot about the company. Its performance against others and its comparative advantages will show if the stocks are lucrative. Who knows, you might find a different company that is worth investing on.

  • Expansion of Earnings

You might find a company that is making a decent amount of profit at this moment. However, if its earnings remain stagnant over time, it may not promise future growth.

Not doing enough to grow its earnings is a bad sign. A competitor might come in and take away its market demand by doing more. If it is not trying enough to expand earning over time, then it is not a lucrative one.

Check out the company’s earning trends and understand if it is gradually growing. Even the slightest growth means that it is going towards a more profitable future, which makes it a profitable venture.

  • Know all the ratios

If you are not a seasoned investor, there are some technicalities about stocks you must understand. There are a few ratios that help people understand the profitability of a company.

1. Price Earning Ratio

When doing research about stocks, you will see that price earning ratios coming up a lot. The P/E ratio tells us how the stock price is doing in comparison to the profit the company is making.

Why is the P/E ratio important? It helps us to understand the growth of the company in the future.

A high P/E ratio is a great sign of possible future growth in earnings. Comparing different company’s price earning ratios might help you to choose the more promising venture. You can find easy P/E calculators online.

2. Debt Equity Ratio

The debt-equity ratio is another indicator of whether investing in a company would be successful. Comparing the debt-equity of a  company with its peers will help us understand the present success of the company as well as whether it will do better in the future.

Debts are not necessarily a bad thing. Even large multinationals like Google have short or long term debts. However, this ratio helps you to understand a company’s liabilities as compared to its assets.

High D/E means you are making a risky investment. If something goes wrong the company will have a high debt to pay and may go bankrupt.

You can calculate D/E ratio with calculators like this one which is available online.

  • Stock Volatility

The beta of stocks is another technical factor that helps you pick stocks. Beta measures the stability of stock in the market. If the stock has high beta measure it will be a riskier investment. It means that the company stock performance is unstable in comparison to others in the market.

If the stocks are volatile and susceptible to change, the price might drop at any moment and make you lose money. Beta helps you understand the trend of the company’s stock’s performance in the market.

  • Trustable Management

Elon Musk is a reliable leader for his companies. You can easily see how he handles his company and leads them to a path of success.

Not everyone is going to be Elon Musk. But, if you want to invest in a company, you must find out if its leaders and managers are trustworthy.   You should ask yourself if the company you are investing in is in the hand of a dependable leader. Check out the performance and dependability of the leaders and management of the company you are interested to invest. Do thorough research on their management strategies and policies

The success of any corporation depends on those who lead them. Only after doing the full research on the capabilities of the management, invest in their company.

  • Importance Of Dividends

Stock traders love dividends. Dividends are rewards that companies might give their investors. Look into companies that pay dividends. The dividend amount the company is paying for its stocks is an indicator as well.

It does not have to be a high amount. If the company is paying moderate, stable dividends that is a good enough sign for your investment. Stable performance in any situation is better in regards to the stock market.

If a company is paying out high dividends, it is often a bad sign. It can mean that they are desperate to find investors. It can also mean that they are not valuing and investing well in their company.

Conclusion

The bottom line is that you should only pick stocks in companies you have deeply researched. The final decision of buying is a heavy responsibility. Even after being super careful, experienced investors lose money. So, it is always better to know what you are getting yourself into.

Understand that you are not gambling and making careful decisions after thorough research. If you are a first-time investor, look into the technical details.

Study market trends and look into different sectors. Compare the company’s performance against its peers and see what makes it better or worse. Don’t take your investments lightly and make sure to invest in stable stocks of a capable and promising company.

For more articles, visit OD Blog.

Share