There are over 8,000 U.S. stocks traded on the major exchanges. In order to narrow that massive list down to build an effective portfolio of investments, you’ll need to do a little research, a bit of math, and keep a careful eye on industry and market developments.
Of course, any well diversified portfolio will include not only equities, but bonds and international investments, as well as cash and near-cash (short-term bonds). And though there is always risk involved, a wise investor follows a prudent path to profits. That begins with a careful assessment of stock value and performance.
Know What a Company Does Best
Many experts recommend that investors buy stocks of companies they know and like. The challenge is, as consumers, many times we only “know” a limited amount about our favorite brands — and may only have a handful of companies that we are really loyal to.
A diversified portfolio can mean having a dozen or more stock holdings. Having a deep familiarity right off the bat with that many companies is unlikely, but still, doing research into your favorite brands in order to determine if they would be a good fit for your portfolio is a great place to start. Not all will make the cut, but it’s a good way to start learning how to research a stock. Then, as you round-out your investment holdings, you can research and learn about other companies that deserve your ownership stake.
Consider Earnings: Past and Future
When it comes to investing in stocks, it’s all about earnings. Some companies may be good at raising capital, commanding social media buzz and grabbing headlines — but rarely make a profit. When it comes to giving an investor a return on their money, it usually means finding companies with solid corporate earnings.
As you narrow down your list of prospective stock investments, look for earnings per share. Most any stock profile page will have it listed. It may be followed by (ttm), which means “trailing twelve months.”
Now you want to research what the historical earnings growth rate has been – and what analysts are predicting the growth rate to be going forward. All of the popular financial sites will also have this information listed as a part of a stock profile, often under “analyst estimates.”
Stocks that have a solid history of growing profits and have an optimistic outlook for continued earnings expansion can be good candidates for your portfolio. Companies that pay out dividends to investors may deserve even additional consideration.
Compare P/E Ratios
Dividing the company’s stock price by its current earnings per share will also reveal another critical piece of information: the price to earnings (P/E) ratio. In fact, you don’t even have to do this simple math, either. The P/E ratio is included on web stock profiles as well.
Comparing a company’s P/E with its competitors, its industry and the market as a whole can give you a good idea of its value, though there is no “perfect” P/E. A company with strong prospects for earnings growth along with a P/E that is lower than its competitors may be a capable contender for your stock portfolio.
As a new stock investor, stay ahead of the game and try not to fall for these common trading traps:
- Trading too often. Trading costs can add up quickly, considering commissions, fees and taxes. Invest for the long-term by buying stocks that you feel comfortable with holding for years.
- Falling for “hot tips.” Resist buying a stock that you haven’t thoroughly researched.
- Going too deep into one stock. Diversify your holdings with exposure to different industries, countries and company sizes.
- Trading on fear or greed. Remember, you want to buy stocks on sale and remember to trim your winners now and then to protect your profits.
Minimizing expenses is also important. Finding a brokerage firm that can offer you an affordable stock trading account along with ample research resources is a critical part of investing success. In fact, some firms offer low-cost or free brokerage accounts as part of introductory offers — and discount brokers are also well worth consideration.
We’ve only barely scratched the surface to the process of evaluating stock performance. Digging deeper to find great stocks to invest in can involve tracking industry trends, considering a company’s assets, liabilities and much more. So many books, websites, television networks and advanced courses are dedicated to the topic.
It all begins with finding a company you love, doing proper due diligence and monitoring your investment’s progress. Real stock wonks enjoy reading corporate annual reports, balance sheets, stock charts and analyst opinions.
Like what you see? Sign up for Investorplace’s Young Investors e-letter and get practical investing advice delivered to your inbox every week!