If you’re new to investing, you may find it challenging to pick what stocks to invest in. Investing provides individuals, families, and businesses with enormous opportunities for growth and can be used to meet a wide range of financial goals. But to benefit from investing, you need to understand the basics of a fundamental category of securities: stocks.
In this article, we will cover:
- What stocks are
- How you can find stocks to invest in
- Investing in stocks with professional help (recommended)
- Investing in stocks directly
- Practical tips to get started
What are Stocks?
Simply put, a stock is a security that represents fractional ownership of a company. For instance, if you own Microsoft stock, that means you own a portion of Microsoft.
Stocks are acquired and can be traded on stock exchanges. They are sold according to supply and demand-based price fluctuations that occur throughout the trading day. Stock prices are subject to change for a variety of reasons.
As an investment class, stocks are the foundation of most investors’ portfolios. This is true even for investors who don’t directly invest in individual companies’ stocks. Common investment vehicles such as mutual funds and ETFs, for example, typically hold several, dozens, or even hundreds of stocks.
How You Can Find Stocks to Invest In
There are several ways to invest in stocks. Many people don’t buy stocks themselves but instead have a brokerage firm or investment advisor make purchases on their behalf. Other investors open brokerage accounts and purchase individual stocks on their own.
Let’s take a look at both these processes.
1. Reach Out to an Investment Firm to Pick and Manage Stocks for You
Investment firms are professional financial institutions whose primary activity is investing in various securities. By law, they are heavily regulated (by the SEC in the U.S.), and most are backed by professional, skilled teams.
When you invest through an investment firm, you pay for the following services:
- Deep qualitative and quantitative research into different companies’ stocks
- Stock picks based on your preferences
- The long-term management of your stock portfolio
Because they offer these services, investment firms are a good option if you don’t have a lot of time to do deep research into various companies. Investing in stocks is a full-time job for the professionals, who trade their time and expertise for a mix of fees and commissions (significantly, those costs fees and commissions can vary greatly from firm to firm).
Despite the range of time and resource-intensive services that investment firms offer their clients, going with an investment firm is not always expensive. Indeed, modern investment apps may offer actively-managed stock portfolios for a low rate.
2. Find Stocks and Manage Your Investments on Your Own
Managing your investments on your own is known as “direct investing.” To manage directly, you will need a brokerage account to hold your investments. Once you’re set up, you simply just place buy orders on the stocks you want to invest in.
The direct investment process is relatively simple. However, because you’re taking your investment portfolio entirely into your own hands, you must perform tasks generally left to professionals if you want to succeed.
We should caution that building and managing a stock portfolio on your own is difficult. Even most hedge funds cannot even beat the market’s overall returns (consistently, anyway). So if you hope to even pull even with the market, you should take care to make informed decisions based on a fundamental understanding of your investments.
You can choose to let experts manage your investments, for example, or else do it yourself. If you decide to do it yourself, see below a list of things to consider to find and pick stocks to invest in:
Define Your Investing Goals
It’s essential to outline the purpose of your investments clearly. For example, are you saving for retirement? Or perhaps you just have a set amount of money you want to make through investing within a specified timeframe?
Every brokerage will ask each client about their goals before they get started. These goals will help set the parameters for how much risk the investor is willing to take on.
Pick an Industry You Know or Like
Professional investors must have a deep understanding of the stocks they work with. And this understanding starts not with individual companies but with their wider industries.
To start, choose an industry you know well— or at least one you would like to know well. Then, you’ll need to dig deep into overall industry trends and look at the performance of many companies to see which may be undervalued.
Without a strong understanding of your intended investment sectors, it makes more sense to outsource your active management. Or, you can opt for a passive investing strategy and simply track your industry of interest’s relevant index. For example, if you’re interested in oil and natural gas, you could refer to the S&P Oil & Gas Exploration & Production Select Industry Index.
Find and Research Companies
Now that you’ve settled on an industry, it’s conduct research into relevant companies that may serve as sensible investments. Of course, this is easier said than done, but you can use one of these methods to make a shortlist:
- Look at the best ETFs in the industry. Look at the stocks those ETFs have invested in. Simple Google searches can reveal the top ETFs in any industry, and all ETFs have a published list of stocks they include.
- Use a stock screener. Stock screeners filter through a long list of stocks based on your specified criteria. They filter by category (industry), then by crucial factors such as dividend yields, market caps, price to earnings ratios, and more.
- Join a community of investors and subscribe to some reputable newsletters. As a beginner, you’ll have a lot to learn from the pros. Read and ask questions to help narrow your search.
Discard Risky Companies
Risk in the stock market comes in several forms. During your research, you’ll probably filter out plenty of companies that are risky for various reasons. Also, remember that companies change over time – some investments that were once good can become too risky. With stocks, potential risks include:
- Situational market risk
- Concentration risk (when your portfolio is not diverse enough)
- Management risk
Determine a Fair Stock Price
A “fair stock price” is the fair market value of a specific stock. This price is determined by the sale price, which is agreed to by willing buyers and sellers who enter a transaction freely and with a complete understanding of what they’re doing. A stock is considered to be at fair value when Price/Earnings ratio = Growth Rate.
Investing
This is the easy part. Once you’ve selected your companies, you can buy their stock from a broker. When choosing a broker, keep their fees and commissions in mind.
Get Started with Picking Stocks
You should only get started with your stock picking after you’ve done significant research or settled on a reliable broker. Your choice of broker is significant, as their fee structure and level of service will play a part in all your trades.
You may find it easier to start with an actively-managed investment firm as a beginner. While this may sound pricey, there are high-quality, pretty inexpensive options.
