How to Pick the Right Stocks
A checklist for beginners to guide their selection of the best stock market investments
Knowledge of how the stock market works is one of the most important things for investors to improve their chances of being successful in the stock market.
While many factors influence investors’ decisions to own certain stocks and not others, and those may vary according to the specific circumstances at any given time, in many cases it may be helpful for investors to develop an abbreviated list of topics or guiding questions, to make sure they are not forgetting to check something that may be relevant to their decision.
That list of topics depends on each investor’s perception of what is important to look at in stocks before making a decision to wait, purchase, hold, or sell stocks. Examples of questions that could be included in such a list, helping investors pick the right stocks, are included below:
● Are the economic and socio-political trends in the country likely to favor or affect the long-term performance of the stock, and/or the economic sector in which the company operates?
● What has been the performance of the stock in the last few years (i.e., five-year chart)?
● Is the company a market leader in its niche? Are the current levels of growth likely to be sustained over time, and is the business doing something to gain a greater market share?
● What are the current market trends reflected in the major stock indexes? And are there technical indications of potential trend shifts in the market or in the price of the stock?
● Do the fundamental indicators like P/E, EPS, and debt indicate potential overpricing? If so, is there still room for substantial growth, enough to make sense to purchase it?
● If the company issues regular dividends, are they expected to remain or change over time, given the expected position of the company in the market in relation to its competitors?
● What is the company’s ESG rating and its main ESG risks? Does the company rely on manufacturing or production processes in countries that could pose challenges to its business model?
● How long is the stock planned to be kept before considering selling it? And, once bought, under what circumstances could this stock be sold before its planned time frame?
Having an exit plan for the stocks considered for purchase is in many cases as important as the criteria guiding the decision to buy them. Defining the timing and/or circumstances when the stocks could be sold can prevent investors from making rash emotional decisions.
The price of stocks in the market fluctuates all the time, ultimately driven by supply and demand, as part of the constant movement created by the aggregated behavior of investors. However, new investors who adopt a long-term approach to investing, and include measures to manage the risks to their portfolios, would have a good chance of seeing their money grow over time.
This and other related topics are explained in greater detail in the book “How to Invest in Stocks: A Beginner’s Guide to Making Money and Managing Risk in the Stock Market,” available in hardcover, paperback, and digital editions.
Disclaimer: The contents of this article are provided for educational purposes only and are not intended to be investment, tax, or legal advice. Any action taken upon the information on this article is strictly at your own risk. Readers interested in obtaining investment advice should consult a duly licensed investment advisor.