Thanks to digital technology, online brokers and more sources of market information than ever before, it’s now easier than ever to get started as a trader or investor. The barrier to entry, in terms of capital and know-how, is pleasingly low, and the internet has levelled the playing field for everyone. However, once you’ve opened an account, familiarized yourself with trading tools and instruments, and developed a good level of background knowledge, you still have to take that daunting first step of making your initial stock purchase.
Too much choice
In one sense, this is easy. There’s no shortage of affordable stocks and shares on the market, and all it takes is a click of your mouse to add it to your portfolio. However, choosing the stock can be the problem, precisely because there are so many options. Which is the best selection? Which stocks are going to increase in value, making you money, and which are going to sink like a stone, forcing buyers to sell them for a fraction of what they paid?
It’s in the nature of trading that you can never be 100% certain whether a stock’s value will rise or fall. It’s also impossible to calculate exactly when prices will change, and by how much. However, there are criteria you can apply when looking at stock that will narrow the field, and that will help you find the share options that are right for you.
Consider your goals
Trusted sites can recommend starter stocks that are ideal for beginners, often naming low-risk companies that are the leaders in their respective fields and solid household names. However, before choosing a stock, you should consider your personal trading or investing goals, as well as your current financial position and risk tolerance. Knowing how you want a stock to perform will be a great aid when selecting one.
Are you buying stock that you hope will increase in value quickly so that you can trade it at a profit? Or do you want stock that will give you a regular income, in the form of dividends, over a long period?
Are you interested in preserving your wealth against inflation? In this case, look for stable companies that are able to weather economic downturns, such as low-risk, blue-chip options. If you’re looking for capital appreciations, look for new companies with a lot of room to grow. This involves more risk, but greater potential gains.
Adjust the balance
A diversified portfolio is essential. However, as well as including stocks from different sectors and countries, look for different kinds of stocks from all the categories mentioned above. Adjust the balance according to your goals and your personal risk tolerance.
Follow your interests
Once you’ve decided on the type of stock you’re looking for, it’s time to get down to some solid research. It makes sense to choose an industry that you’re interested in, as you’re more likely to be able to understand when a company is likely to do well, and when it’s doing badly. Just remember to stay objective and hard-headed, and don’t get emotionally involved.
Make sure that you keep up with industry news and trends, while also understanding the bigger picture in regard to the global economy. Look at blogs, business news and expert opinions, but make your own decisions based on logical analysis. What commodities or services are most likely to see increased demand in the near future? Which companies are best placed to succeed?
Digging deeper
Once you’ve narrowed down the field, start looking more closely at specific companies. This means digging into corporate press releases, investor presentation reports and financial statements, as well as reading what other people are saying about them.
Exchange-traded funds (ETFs) are a good way to see which companies are doing well in a particular sector. You can easily look up an ETF that tracks the industry you’re interested in to see what the top holdings are. You can also use a stock screener to filter stocks based on your pre-selected criteria, from sector type to dividend yield, and so on.
Different answers
There is no one-size-fits-all answer to the question of which stocks to choose. If stock market performance was an exact science, then either we would all be millionaires or none of us would. Besides, what one trader or investor considers an ideal stock may not be what the next person is looking for at all.
Decide how you want a stock to perform, choose a sector you’re interested in, and then gradually narrow the field. Choosing a stock is not something you should do overnight, and a great deal of due diligence and serious research is required. Once you learn the process, it should get easier with each successive stock as you gradually build up a well-turned portfolio.
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