Digging a little deeper into strategies for choosing a stock in which you want to invest involves focusing on your individual goals and willingness to take on risk. As mentioned in Part 1, buying and selling individual stocks is riskier than investing in a Mutual Fund or ETF that attempts to match the performance of a whole “basket” of stocks.
Related: BUYING ON THE DIP
Set Your Goals
Depending on your personal goals, your focus will fall along a spectrum between growth and income. Growth investors seek higher-priced stocks from companies showing lots of growth and a great deal of potential. Examples include Amazon.com Inc. AMZN or Facebook Inc. FB.
Income investors are attracted by slower-growing, stable companies that pay dividends on a regular basis. These companies are often referred to as blue chips and include corporations like The Coca-Cola Co. KO or McDonald’s Corp. MCD.
Learn Basic Terms
Picking stocks can be scary but doesn’t need to be. There’s lots of confusing language out there but knowing a few terms can help propel you into investing without filling your head full of hard to understand information.
P/E ratio: The price-to-earnings ratio (P/E ratio) compares the price of the stock with the earnings each share generates. It is arrived at by dividing the price by the earnings. The historical average is 15.7.
Revenue growth: Revenue means “total sales” in a given period (quarter or year, for example). Stocks need to show revenue growth to be taken seriously by Wall Street and by investors.
Dividend yield: This reflects the annual dividend per share divided by the stock price. Basically, it’s the percentage of a stock’s value you get paid back. The S&P 500's average dividend yield is 1.9%, to give you some perspective.
Choose A Sector
When starting out, it’s best to pick a sector you are familiar with. (This idea was also discussed in Part 1). It follows the advice that you “buy what you know.” This doesn’t mean you have to be an expert – just that have enough understanding of the industry to be able to go through a financial report and make some sense of it.
Related: EQUITIES VS. FIXED INCOME
Pick A Stock
Consider potential growth and future value (P/E ratio). Ask yourself if the stock is both sustainable and competitive. Look for powerful, well-known brands and historic dominance in a sector.
Once you are satisfied a company meets the criteria you set and assuming it is priced properly, you can buy the stock and add it to your portfolio. Individual stocks, of course, should not be all you have. Index funds are reliable and much less risky. Having a sizable percentage of your investments in less risky index funds lets you explore the world of individual stocks without stress.