Finance 101: How to Choose Stocks

If you have been thinking about upgrading your investment portfolio and haven’t yet invested in stocks, there is no better time than the present. In simplest terms, buying a stock means you buy a share of a company, but it isn’t as simple as choosing the most lucrative companies and waiting for the money to roll in. You must understand how to choose stocks that best meet your needs before investing in them.


Decide on a Method of Analyzing Stocks


There are three ways to analyze stocks and find the ones that are right for you: macro analysis, fundamental analysis, and technical analysis. Macro analysis focuses on analyzing how major forces affect the economy and a stock’s performance. People who use this method aim to avoid overpaying and to diversify their stocks when the economy is doing poorly.


Fundamental analysis involves determining how much you think your stock is actually worth. It is important to note this number could vary from what its current trading value is. Simply put, if you think the stock is worth more than its current price, buy it. If you own one that you think is worth less than its current trading price, sell it.


Finally, some traders use technical analysis. Also known as charting, this method focuses on price movements in the market. It helps you to find the short-term trends and use them to determine how much you think a stock will be worth in the long run. This method is typically used by traders, not investors.


Keep Up With Market Events


You can’t be an informed investor if you don’t pay attention to what’s going on in the world of stock investments. Whether you check magazines, the financial section of the newspaper, or follow relevant financial blogs, you should check for new information on a daily basis.


Always scrutinize the information you come across. For example, if one company has an infinite supply, high demand isn’t likely to change stock values much because it can always supply the demand. As you become comfortable keeping up with market events, you may find that corporate press releases and presentation reports released by investors are more in-depth sources of information.


Evaluate a Company’s Financial Health


Once you become interested in a company, evaluate its financial health before purchasing stock. Public companies must release quarterly and annual financial reports, so start there. You can usually find them in the investor relations section of a website or by searching the Securities and Exchange Commission website. Look for the company’s revenue growth, its bottom line, and how much debt it owes. If the company has a dividend, it’s a sign that it is in good financial health. Be sure to determine if the dividend payment is increasing or not.


Avoid Stocks That Never Move


Stocks that never move are those that remain the same price whether the overall market is on the rise or falling. Known as defensive stocks, they are typically held by investors attempting to defend themselves from a possible bear market. These stocks are usually too conservative because they underperform in the long run and have no real growth potential.


A defensive stock may appear to be a solid investment while the market is falling, but in reality, it is an illusion. They won’t rise the way other stocks do, leaving you with less money than if you chose riskier stocks. Some examples of defensive stocks include food companies, utility companies, and gold stocks.


Don’t Be Afraid to Skip the Mainstream Investing


Research has shown that mainstream investors are wrong more often than they’re right, and the people who trade with them often agree. Many people are turning to contrarian stock trading, which in simplest terms, means thinking and trading independently based on your own feelings. While it is important to keep up with financial news, that doesn’t mean you should get caught up in media hype. Following your own gut instincts when it comes to trading often works better in the long run than if you were to let a trader or investor do all the work for you.


Even so, it still isn’t as simple as spinning a proverbial wheel and choosing a company. You should have enough knowledge to work together with your instincts. There are many materials available to help you learn about contrarian investment thinking, including Fisher Investments Beat the Crowd, a book that shows you how you might be able to avoid common pitfalls in the world of stock investments.


Stock trading and investing is just one component to a well-rounded financial portfolio. Always be sure to diversify your investments in order to best protect yourself and your finances for the future.

About the Author

Financial professional and online entrepreneur, I'm best known as The Financial Blogger. I want to make money because I like enjoying life the way it should be; with a lot of great food and wine! I also love to spend time with my lovely wife and 3 kids!