Tips for Finding the Best Stocks: Investing in stocks for the long term is a sure way to build wealth. But before that comes researching a stock, which requires time and commitment. But doing your homework is an essential part of investing. You want to make sure that you’ll get a decent return on your investment and not lose your capital. You could just outsource the research part to an investment newsletter. But if you take a DIY approach, you not only get a front-row seat to the action, but you will also save a lot of money.
Tips for Finding the Best Stocks
If you’re looking to get into investing in stocks, you can open an account with a broker that provides screening and research tools. But choosing the best stocks is easier said than done. Investors are constantly on the hunt for stocks primed for growth, but at the same time, you don’t want to pay too much. Stocks are considered a safe investment if you have a long investment horizon. Still, there are a few things to consider before purchasing your first stock.
Look at the numbers
How much does a company earn and whether its earnings have been growing over the preceding or year-ago quarter is a good indicator that the company is on solid footing. To find this information, you can visit the company’s investor relations website. Publicly traded companies are also required to make quarterly and yearly filings with the US Securities and Exchange Commission where they have a section dedicated to earnings. Also worth looking into is the company’s forward-looking statements, which will give you an understanding of what the future holds for this company.
Compare it to competitors
A company’s strength relative to peers is something that shouldn’t be overlooked as you hunt for the best stocks to put money in. You can start by looking at the industry as a whole, where the company fits, and what strengths or weaknesses it possesses relative to peers. This information will provide you with valuable information on whether the company has an edge over others in the industry. Renowned investor Warren Buffett referred to this competitive advantage as a moat in 1999.
Don’t forget the dividends
Your investing capital will see an increase as the company’s stock price appreciates. But investing in a dividend-paying company is a great way to generate passive income. And just like earnings, you’d want to see if these dividends have been increasing or not. Even if the company has been maintaining its payment, that’s fine because you’ll still generate passive income. Dividend stocks provide steady returns and are a good choice if you’re saving for retirement. A word of caution though: dividends are never guaranteed and companies can decide to stop paying dividends at will.
The captain of the ship
Assessing a company’s executive leadership is an often overlooked metric, but it is essential to choosing your next investment. A well-managed company enjoys a better stock price than peers and manages headwinds well. Several companies today invest in leaders and have effective succession planning in place. You can also listen to a company’s call with shareholders or read through the transcript to get a sense of how leaders treat their shareholders. To give you an example, the then-president and COO of now-defunct energy firm Enron turned to profanities when an analyst asked a tough question.
Arrive at a fair price
There are many ways you can determine a company’s current price and whether or not it’s fair. You can look at the price-to-earnings ratio, price-to-sales ratio and discounted cash flow modeling to get a sense of whether the current is fair or not. Stock prices are determined by future growth prospects, so stock may trade at a higher PE ratio if investors think the company’s future looks bright.
Respect the process
Maybe you’ve wound up with a potential company to invest in or maybe you haven’t. You may have not liked the industry or maybe the company lacked fundamentals you were looking for. In either case, it’s fine. It’s better to not make an investment at all than to make one and lose money. Making a sound decision at the end of your research exercise is part of the stock-picking process.