How to choose a stock to invest in

There are many stocks traded on the stock market, and at the first glance at the quotation list a novice investor's eyes, as they say, are confused. Many people make the mistake of choosing securities by name or by someone's advice.

Meanwhile, for a competent choice of shares for investment it is necessary to understand the processes on the stock market, as well as to study not only the company's shares, but also the company itself, which issues them. So how to choose the right stock to invest in?

Where to start when choosing stocks

The choice of shares should be approached with a working investment strategy, which will allow at the initial stage to screen out companies whose securities are unsuitable.

After that, you need to carefully analyze the company's activities and the dynamics of its shares. Why is this necessary? Analyzing the dynamics of a company's stock will minimize the risk of buying overvalued securities. Studying the company itself will allow you to avoid potentially unprofitable investments.

Which indicators you should pay attention to in the first place

Before selecting a stock, carefully examine the following company's financial results:

• turnover - the revenue that the company receives from the sale of services and goods;
• Gross profit is the revenue from which the cost of production has been deducted;
• operating profit is gross profit minus operating expenses;
• net profit is the profit received by the company after the payment of taxes and liabilities on loans and borrowings;
• Free cash flow is the money left over for the company after deducting an amount for expenses to expand or maintain assets;
• earnings per share - is net profit divided by the number of issued shares. This indicator is a key one for the shareholder.

All of this data is freely available on each company's income statement.

Basic principles for selecting stocks

There are several proven methodologies for stock selection that are used in the stock market and recommended by top advisors. Despite their different concepts, they all boil down to the same principles:

• Choose shares only in those companies whose activities (business) are clear to you.
• It is necessary to study the goods and services available in the market. Companies that produce goods and services that have been in stable demand for many years deserve attention.
• Examine the financial statements. Priority should be given to companies whose revenue growth is at the ±25% annual level.
• Analyze the distribution of the company's stock. If any of the major corporations owns a large stake in the company, then they are worth looking at.
• If there are difficulties of some kind in the choice of shares (you do not fully understand the business of the company, there are some doubts or just intuition tells you), then the purchase of such shares is better to postpone.

What its management has to say about the company

Information about the people who run a company should not be underestimated. It is the actions of top management that lead a company to prosperity or financial ruin. When selecting stocks, pay attention to the following information about the executives who run the company:

• how long the chairman of the board of directors has been in office;
• how the company's key financial indicators have changed during his leadership;
• whether the company's top managers have specialized education and experience in other companies;
• what achievements or failures the company's management has had;
• how many shares of their company are held by executives, and how often they buy them.

It is also possible to read the biography of the company owner. If the company is large enough, information about the owner and even an interview with him can be found in the media on financial topics. Simply put, do a little investigation in a good sense of the word, because this is the person you are entrusting your money to.

What the share price and capitalization of the company can tell about

Selection shares, based on their priceThis is probably the main mistake of a beginning investor. Cheap stocks are not a sign of a bad company, and expensive ones are a sign of a good one. For example, in 2020, Apple stock was worth more than $300, while in 2002 it was only $6.

Selection of shares by quality indicators

To assess the quality of a company, a number of multipliers related to capitalization are used.

For example, in order to determine the investment benefit is used multiplier P/E - capitalization divided by income.

To find out the potential dividend yield or to track stock performance, the inverse E/P multiplier is used - annual earnings divided by capitalization, multiplied by 100%.

Stock selection cannot be based solely on the analysis of qualitative indicators, but without taking them into account the strategy of choice will be incomplete.

Analyze the profitability of the company

The analysis of profitability rates will allow the investor to find out how much money the company earns from the invested funds.

When assessing the profitability of a company, several multiples are used. Investors with experience will be sufficient to analyze two or three, for the novice investor it makes sense to study them all.

More about the company's profitability

Explore the company news

Each company that issues shares publishes its reports, which can be found on the official website in the section for shareholders and investors.

However, in order to influence the share price, companies periodically publish news. The logic is simple: good news increases the stock price, while bad news decreases the stock price.

Accordingly, by analyzing the company's news for a certain time period, you can form an evaluative view of its activities and decide whether to consider the company for the purchase of its shares.

Since all news about a company affects its share price, it should be monitored constantly. Particular attention should be paid to changes in management, new product launches, new branch openings, etc.

Analyze the dividend policy

The payment of dividends is one of the most important factors in choosing stocks for long-term investment. Naturally, the priority for the investor is those companies that consistently pay dividends. To do this, it is worth carefully studying the "Dividend Policy" section on each company's official website and starting with the dividend payments for the entire period.

Particular attention should be paid to the dividend yield - the EPS multiple, as well as the timing of stock purchases. If shares are purchased after the shareholder register has already been closed, dividends can only be received in the next period.

Learn more about how to earn dividends

Are there any difficulties in buying shares

A private investor can independently analyze all available shares and choose to buy suitable ones. However, their purchase is possible only through a broker who has a stock exchange license.

Here the main point for the investor is the commission, which the broker will withhold on transactions with the shares. As a rule, it varies in the range of 0.5-1% from the transaction. Information about the size of commissions should be clarified directly with the broker.

For novice investors, the best rates are those with the lowest turnover fees. For more experienced investors, tariffs with low service fees are more appropriate.

Results

Selecting stocks for investment - This is a very important topic, the scope of which cannot be crammed into a single article. A novice investor will have to study in depth the mechanisms of the stock market and the activity of companies. In spite of the seeming complexity, with time the necessary understanding will come, and the purchase of shares will turn from the torment of choice into a source of permanent income.

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