How to Choose Stocks: 7 Things Every Newbie Investor Should Know



Do your homework before buying stocks. When deciding to try your hand at stock picking, it is essential to do …

Do your homework before buying stocks.

When you decide to try your hand at stock selection, it is essential to do your homework. Your goal is to find good value, especially if you plan to hold an asset for a period of time. But before you can fully trust a company, you need to do extensive research, examine a stock’s fundamentals to monitor its viability, and see if it still has room in your portfolio. It is not a simple purchase: you become part owner of a business. Investors should therefore be prepared to do the appropriate analysis. Here are seven things you should know about a business before investing your hard earned money.

Trends in earnings growth.

Over time, do the company’s profits generally increase? If so, that’s a pretty good indication that the company is doing something right. Even a small, steady improvement over a long period of time can be a positive indicator. But earnings growth and value have to go hand in hand for the action to be worth it. You want to look at the company’s financial reports – available on the company’s investor relations website – quarter after quarter and on an annual basis, to determine whether revenue and profits are increasing or decreasing. Companies that show positive earnings growth tend to have financial and operational stability. You also want to research what steps the company is taking to increase its revenue. A business that has a proven strategy for increasing sales, attracting new customers, and developing new products might be worth the investment.

The strength of the company compared to its peers.

Start by looking at a industry represented in the market and determine if there is potential for growth. Industry can be a great filter when making an investment. However, when choosing individual stocks within this industry, you need to consider where and how the company fits. How does it behave compared to its competitors? What is its market share? Is there an advantage that makes it stand out? These critical questions can help determine if a business has an advantage. To make a fair comparison, line up competitors of the same size or market cap and look at their earnings and the performance of their stocks over a period of time.

Debt ratio in line with industry standards.

All companies are in debt, even Inc. (ticker: AMZN) and Apple Inc. (AAPL). Investors can use debt as an indicator of a company’s financial well-being. Beware of companies with a high level of debt relative to their equity, or rate of endettement, a measure used to measure a company’s total debt relative to market value. To find this number, divide the total liabilities on the company’s balance sheet by the total amount of equity. For those with a lower tolerance for risk, that number should be 0.3 or less, according to industry experts. There are exceptions. For example, look at the debt ratio in an industry. In the construction industry, which relies on debt financing, a higher ratio may be acceptable. But if the debt is too high, it could put pressure on profits. Make sure your pick meets industry standards or has a compelling story as to why not.

The price-to-earnings ratio can help provide market value.

The price-to-earnings ratio, or PE, is a valuation measure that shows how well a stock’s price reflects the company’s earnings. When you use fundamental analysis and value investment strategies, the PE ratio is considered a major indicator of whether a stock is undervalued or overvalued by the market. To find the PE ratio, divide the company’s stock price by its annual earnings per share, either over the past year or estimated over the coming year. For example, if a company is trading at $ 40 per share and earnings per share are $ 2.50 for the past year, the PE ratio is 16, which is a little below the average for a company in the past year. S&P 500 in October 2021. Ratio is key. way to compare companies in the same industry or sector. A company with a lower PE ratio is not as valued by the market as a company with a higher ratio. Your job as an investor is to determine if the stock deserves that lower valuation or if the market is undervaluing it, which might make it a good choice.

How the company treats dividends

A company that pays dividends is often one with a certain degree of stability, especially if the company has steadily increased its payments every year over the decades. But watch out for companies that have very high returns, calculated by dividing a year’s worth of dividends by the stock price. A higher dividend yield can mean that a company is desperate and trying to attract or keep investors with this stream of income. High dividends can also indicate that a company is not investing enough in itself. A company can temporarily or permanently reduce its dividend to obtain more liquidity in difficult economic times. This does not necessarily mean that the business is in danger, but rather that the business may need more money to pay for immediate expenses. Companies can cut dividends if they expect lower profits or unforeseen short-term expenses, in which case they would keep the money that would have been distributed as dividends to meet their financial needs. But if a short term problem becomes long term, you may need to re-evaluate your position.

Effectiveness of executive leadership.

The assessment of a company’s leadership is more of a qualitative assessment, but it is essential to the valuation of an action. How much do you trust the people who run a business? Effective leadership fosters a stable and sustainable corporate culture, balanced by innovation and flexibility. Companies that invest profits in themselves develop their business growth and strengthen their position in their industry. A well-run business is often one whose stock prices tend to rise over a long period of time, in different business environments. To assess the effectiveness of a business, it can be useful to consider how long the leadership has been with the business, what kind of expertise they bring and how this translates into added value for the business. company, and whether they are transparent and trustworthy with their shareholders. Investors can find transcripts of speeches made by executives or listen to quarterly earnings calls to get a feel for how executives in a company treat shareholders.

Long term strength and stability.

The stock Exchange by its nature – day to day and year to year – is volatile. At some point, a business will lose value in the markets. But what really matters is long term stability. In general, the trend lines should weaken and move upwards. A business that gets over the downturns and comes back relatively strong and only seems to have real problems when everyone else is doing it is probably a good bet. Ultimately, a stable business exhibits some or all of these characteristics: increases revenue, maintains low to moderate debt levels, is competitively positioned in its industry, and has effective leadership. These are just a few of the many important elements of stock selection. If any of these variables change, investors should take note and determine if it is a buy or a bust.

Here are seven things an investor should consider when selecting stocks:

– Trends in earnings growth.

– The strength of the company compared to its peers.

– Debt ratio in line with industry standards.

– The price-earnings ratio can help provide market value.

– How the company treats dividends.

– Effectiveness of executive leadership.

– Long-term resistance and stability.

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How to Choose Stocks: 7 Things Every Newbie Investor Should Know originally appeared on

Update 05/10/21: This story was posted at an earlier date and has been updated with new information.


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