How to choose a stock to invest in

We’ve already covered the topic of stock investment in one of our earlier materials. The first thing you have to do is, of course, to choose the right company. And today we will be discussing this particular issue. It is worth mentioning that there is no single reliable way to do that. However, there are a few pieces of general advice that can help you a great deal. Simply abide by the action plan below.

Choose the company’s sphere

The choice of a company’s sphere should be based on your hobbies and interests. For example, if you are a big home decoration fan, take a closer look at the furniture and homeware manufacturers. Do you have a passion for computers? Turn your attention to game developers and video card producers. Choose not one but several spheres, as you will have to diversify the investments of yours. You will be better off with the companies that operate within the sphere of your interest. It would also be easier and more fun to follow their performance in the future.

You will have to do a lot of research so at least don’t overcomplicate the first step

Study companies in the selected sphere

Compare the companies in the same industry: it can be that right now the dark horses demonstrate better performance than industry-wide leaders. In order to do so, go to the website of your preferred stock exchange (NYSE, NASDAQ or LSE) and go through the list of publicly traded companies. It certainly sounds lucrative to become a shareholder of a huge international company. Smaller companies can be worth studying too, but their share prices can rise or fall. Make a list of companies you find interesting (for whatever reason). Now it is time to study each of them and study thoroughly. Here is how you can do it.

Go through the company profile

Thoroughly study all the information on the company you can find. How did the company develop? How did it transform over the years? How important events affected its share price in the past? What are her plans for the future? Past performance can help you ask better questions, but it does not predict future returns. Be especially attentive when studying earnings reports. Past reports can be found on the corporate websites and online aggregators like Zacks. Upcoming reports are easy to follow using services like Investing.com, where the information is presented in the form of a calendar.

Company’s ability (or inability) to generate stable positive cash flow also plays an important role in the valuation process, directly affecting the intrinsic value of the stock

Pay attention to both achievements and critical failures. It is important for an investor to understand how the company copes with unexpected troubles and what happens to its share price at those moments. It will help to evaluate the risks at the very beginning. And don’t forget liquidity: both the company and its products should remain liquid (have sufficient demand) in the foreseeable future.

Study corporate news

Company plans and news may affect the share price, but an increase is not guaranteed. A new product or a change in management can affect the business and share price in different ways. Shares of large companies can rise or fall too.

Study industry and company dynamics

Study the dynamics of the company and the sphere it operates in over the course of a few years. Slowing down or even negative growth rate is a bad omen. Nonetheless, buying shares after a period of brief growth is also not a good idea — it is like chasing the opportunity that is already gone.

Turn your attention to the companies with mediocre economic results

Past results help frame questions, but do not predict returns or remove risk. Use financial reports to examine the business and consider what could go wrong before buying.

Read analytical reports

By going through the previous steps you have already conducted a certain degree of analysis. Now it is time to consult the professionals and see what they think about the future of preselected companies. Big investment banks post their insights on a regular basis. Conclusions of the well-known individual investors can be found online (including their personal pages on social networks). Analysts, too, don’t have a sixth sense and cannot predict the future reliably. Still, the opinion of professionals will impact your decision — at least it should. Studying analytical reports for the past period is a good idea, as well. The latter will help you evaluate their accuracy.

Compile a portfolio

Several (or even many) companies will leave your initial list during the evaluation process. Some are in decline, the others have demonstrated peak performance quarters ago. Eventually, you will be left with a few companies to choose from. Pick those with the highest potential. Note that only one company per sphere is not enough, try to pick at least a few. Nothing stops you from investing in a number of competing companies first and reallocate the capital later. And don’t forget to diversify your investments.

Spread investments across companies, but remember that a fall in one share price may not be offset by gains elsewhere.

Summing up

Research can clarify risks; a stock can still lose value. Give yourself time to study the company and decide how much loss you could tolerate.