Choosing which stocks are best is a headache if you don’t know the basic rules of investing.
As a beginner stock investor, it must be a challenge for you to choose the best stocks. There are so many options and advice given to beginners, but how would you know which is the right one to follow? After following the tips for new investors, what’s the next step?
In this article, you’ll learn some tried and tested rules that will help you navigate around the plethora of stocks in front of you, and will help you pick the best stocks to invest in.
Keep these basic rules in mind, and you sure won’t be lost.
In picking stocks, you should…
…invest in what you know.
This is pretty simple: you cannot do something confidently without knowing what you want to do. It’s quite the same for stocks: you cannot invest in something which you have scarce or absolutely no idea about.
In doing this, you just have to look at the stocks’ business model. Is it easy to understand? Is it clear? Is it reasonably complex? Is it confusing?
If you’re lucky, you may be able to buy stocks from an industry that you are quite familiar with. It’s much better if you have specialized knowledge about an industry which many other investors find puzzling.
This philosophy is one that Warren Buffet has advocated for new investors.
…invest in established brands.
Investing in companies that are yet to establish their brand, or whose futures aren’t as clear as others, is quite a dangerous path to take. It’s better for investors to invest in brands that have strong emerging grip in the market, or that have immensely established brand.
One small thing to remember: sometimes “brand” means less in one sector, but means the world to another.
To cut to the chase, it’s much better and safer to invest in brands that are highly-admired and found everywhere. When it comes to less brand-conscious industries, you better stick with the top company within the market niche.
…buy stocks that have performed well in a long period of time.
If you have some friends who have been investing in stocks for quite some time, you probably have heard the axiom, “the past does not guarantee the future.”
This is pretty accurate when it comes to investing. However, it is misleading.
Long term charts have to be impressive, although they do not need to be over the top over the previous years, for the axiom to work.
Simply think about it this way: you need to invest in something that has proven itself worthy of your asset.
…avoid small-cap companies.
Pour your money on mid-cap and even large-cap companies instead. This comes from two of the investing world’s brightest minds, Benjamin Graham and Warren Buffet.
If you have been investing long-and-tremendously established brands, following this advice one won’t be much of a problem.
…invest mostly on companies with dividends.
Rule of thumb: the majority of your portfolio’s companies should be ones that pay out quarterly dividends.
However, you may also invest in some companies that don’t offer dividends, although you have to keep their number modest. There are also some companies which are great investment even though no dividends are paid out.
For instance, Google Inc. It does not pay a dividend, but it is still a well-sought stock.
…know that sometimes stocks behave differently from your expectations.
Stocks do not always meet your anticipations. Just like what has been advised to you as a beginner, large movements in the stock market are driven by the bears and bulls. In other words, emotions drive it.
Emotion can change quickly, and it makes the market unpredictable. Worse comes to worst, the stock market becomes dangerous when confidence transforms into fear.
In spite of numerous dichotomies, there is no single working formula in picking stocks. If you’re lucky, your stock strategy may work, and if it’s not your day, it may not work. Consider strategies proposed as theories. Like hypotheses on how to invest.
On a more important note, you have to consider yourself too. Think about your risk tolerance, your personal outlook, time frame, and the amount of effort you willingly exert into investment.
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