All investors, both newbies and experienced players on the stock exchange, should know how to choose the right stocks. A typical beginner mistake is choosing a stock based on sofa expert reviews on the internet, recommendations from friends, and even names. This approach is risky and doesn’t exactly fit the definition of a professional investor.
Whether you choose to invest in economic, pharmaceutical, or transportation stocks, you need an effective trading strategy. You need a deep understanding of stock pricing, types, quality and profitability. Otherwise, the whole process will be a mess, just like buying a lottery ticket.
How to make the right choice?
To select the right stock, we need to look at two parameters: the company and the stock issued by that company.
The first criterion allows us to reject a clearly unprofitable investment, while the second criterion allows us to grasp the true value of the stock, thereby reducing the risk of buying an overvalued asset. Keep it to a minimum.
Company analysis
When choosing a stock, research the company first. Experienced investors recommend paying attention to the following indicators:
- Revenue is the income of a company from the sale of goods and services.
- Gross profit is the difference between revenue and cost of the final product.
- Operating income is a company’s earnings from its main activities. The formula is Revenue minus Costs minus Direct Operating Expenses.
- Net income is operating income minus mandated contributions to state budgets and funds.
- FCF – Cash at the disposal of a company after deducting the costs of maintaining or expanding its assets.
- EPS – The ratio of a company’s net income to the number of common shares outstanding.
All indicators are listed on the company’s income statement. Choosing stocks based on a company’s financial results is the first step in understanding the nature of the investment process.
What should we pay attention to?
There are several effective ways to choose stocks wisely. Experienced investors prefer to use proven methods. Although the concept is different, the essence is the same: a thorough analysis of financial performance. basic principle:
- Investors should only select stocks in companies with a clear business and research the popularity, stability and longevity of their products and services in the market.
- Conduct an analysis of the company’s financial performance (balance sheet data). Analytical studies include quarterly, annual, earnings per share and more. We recommend only prioritizing companies whose revenue growth is at the level of 25% per annum.
- Examine the distribution of stocks among investors. If a world-famous company has a large stake, that stake deserves attention.
Company management
When analyzing companies, it is important to study their owners and operators. The prosperity of a company depends on a competent administration.
Therefore, stocks should be selected based on management’s following metrics:
- The tenure of the chairman of the board.
- The main financial results of the company during his reign were profit, earnings, share price and profitability.
- Profile education of key executives, work experience at other companies, achievements, and serious failures.
- Number of shares held by management, frequency of purchases.
price
The main mistake beginners make is choosing stocks by value. This is a fundamentally wrong approach. A stock price decline is both a temporary phenomenon and an indicator of a company’s negative growth. Business value or company capital is the main criterion when choosing stocks.
quality
Business profitability is a direct indicator of a company’s quality. Investors cannot define market capitalization and ignore quality. To evaluate a company according to this criterion, we need to know how long it will take to fully recoup the money invested. Next he has two options.
- The company supplements its investment by paying dividends and allocates funds out of its net income.
- The issuer invests all profits in the development of the business, resulting in an increase in the market capitalization and the price of the stock. As a result, blocks of stock purchased cost more.
There are special formulas or multipliers for evaluating quality indicators.
news
Issuers must report in the “IR” section. However, companies publish news all the time to keep their stocks in a certain price range. Each excitement of the stock exchange is reflected negatively or positively in the quotes of stocks.Company news is the primary source of these fluctuations
The news is posted on the official website of the issuing company. Investors should constantly monitor events so as not to miss important information. Please pay attention to new product launches and renewals, branch openings, technology introductions, changes in leaders (managers, directors), etc. All economic activity of a company affects the value of its shares.
Profitability
Several profitability estimates are used to correctly select stocks.
Dividend
This is the most important criterion when choosing stocks for long-term investment. The company has the right to independently decide what portion of its net income to distribute to its shareholders. This issue is resolved annually by the Board of Directors and the results announced at the General Assembly. Therefore, it is worth picking stocks in companies that consistently pay dividends.
final thoughts
Stock selection is an important and vast topic that requires in-depth research from novice investors. Investment objectives, strategy, company quality, and multiples are all important factors for successful investment. If you want to save time while leveraging investment recommendations based on powerful market analysis tools, Gainly is the perfect solution. For example, if you plan to invest in the stock of a shipping company, the Gainly application will create a personalized ranking of the best companies in the industry and react quickly to changes that may affect the value of your stock. helps.
