How do you pick stocks? Do you have to listen to a broker, or can you do it on your own?
While some feel nervous about selecting the wrong stocks, knowing the right intel can calm your nerves and help you feel empowered to choose the right investment opportunities.
Here are three tips on how to pick stocks in any stock market:
1. Follow Financial Trends
One of the most effective ways to determine promising stocks is to be well-read on current financial trends. We don’t mean following trendy stocks—also referred to as “meme stocks”—that are highly volatile.
Instead, keep track of financial and market-related news. Also, seek expert opinions from articles, interviews, or other sources. As you research the market, you may discover certain industries tend to offer higher returns on investment.
This brings us to our next point: researching companies and industries.
2. Research Companies and Industries
While you can simply invest in companies you are personally interested in, consider investing in companies and industries that carry a proven track record in the stock market.
Try comparing companies to their industries. If a company and a majority of its industry have a successful history in the stock market, there’s a good chance that success will continue. However, if the said company is the only successful company in its industry, that stock is likely to be more volatile.
You may also use a screener to help your search. Screeners filter stocks based on criteria you set, so you can find and sort companies based on market cap, earnings per share (EPS), dividend yield, and other essential market information.
Once you have chosen companies to invest in, stay up to date on those companies’ financial performance. Watching corporate presentations is a simple way to do this, offering you a general overview of how the organizations use their money, and insights into the company’s future plans.
While corporate presentations do not give the in-depth information of quarterly financial statements (which are often worth reviewing), presentations are easy-to-understand and provide context to financial data.
3. Measure Debt-to-Equity and Price-Earning Ratios
While there are many ways to measure the financial well-being of a company (and thereby its stock), two measurements are key when determining how to invest your money: debt-to-equity and price-earning ratios.
Even the largest companies operate with some level of debt. This is offset by the company’s equity. But if a company’s debt is high relative to its equity (the debt-to-equity ratio), that may be cause for concern.
You can promptly calculate a company’s debt-to-equity ratio by dividing the total liabilities listed on the company’s balance sheet by its total amount of shareholder equity.
Some industries tend to have higher debt-to-equity ratios simply because of how their businesses operate. Make sure the company you invest in has a ratio on par with other companies in the same industry.
The price-earnings ratio is a measure of how well a company’s stock price reflects its earnings. This helps determine whether a company’s stock value is overvalued or undervalued in the market. If a stock is undervalued, it may be a worthy investment opportunity.
To calculate this ratio, divide the company’s share price by its annual earnings per share. You may calculate this compared to the past year, or use estimates for the coming year.
Start Your Investments Today
Now that you know how to pick good stocks, it’s time to put that knowledge into action. But of these tips, which is the best strategy for a beginner investor? Implementing all the listed tips can help you make more informed decisions.
Starting to invest can be overwhelming, but with an investment platform specifically designed for people looking to break into stock markets, investing starts to become easier. Vested Finance is such a platform.