Beginner’s Guide to Buying Stocks

As any veteran stock trader knows, this type of investing is not for the weak-hearted. So let’s assume that you’re familiar with the P/E (price-earnings) ratio and that a lower ratio is better than a higher one. You know that companies with balance sheets filled with cash are far superior to those that are overly burdened with debt. You also know that you should diversify your investment portfolio across numerous sectors.

However, you should also view a stock analyst recommendations with skepticism. If you’ve studied a few other complex concepts, you might be ready to start picking stocks for your portfolio. But suddenly you realize that there are tens of thousands of stocks to consider. Obviously, you don’t have enough hours in the day to look through every one of those balance sheets. So what do you do? Read on.

Determine Your Personal Financial Goals

Before you dive head first into that sea of choices, you need to establish the purpose of your financial portfolio. Experts are aware of the different criteria and requirements involved in the type of investment you’re focusing on. That is why it helps to be on a stock message boards and forums to be able to glean the right knowledge. For example:

  • If you’re looking for capital appreciation, target companies that have a range of market caps and are in varying stages of their life cycle.
  • If you’re looking for capital preservation, you probably have a low tolerance for risk and should consider investing in blue chip corporations that are very stable.
  • If you’re an income-oriented investor, focus on low-growth entities in a specific industry or sector such as utility companies. (HINT: don’t overlook master limited partnerships and real estate investment trusts or REIT’s)

Determining which category of investor you are is easy, but choosing the right stocks? Not so much. Focus on diversification. You can always benefit from a combination of the above strategies.

Keep Alert and Informed

Any veteran stock investor will tell you that staying current and up-to-date with market events and opinions is essential to being well-informed and making the right decisions. For instance, passive research such as reading financial blogs, magazines, and news can be done daily. You might be surprised to find out that any of these research vehicles could help in the development of your stock investment strategies.

Find the Right Companies

Finding the right companies to invest in is probably the next leg of your journey towards making well-informed investments. There are three ways to go about this:

  • Continue your research by reading blogs, financial news, stocks analysis articles, and so on to find the right companies to invest in.
  • Filter through different stocks based on industry or sector by using a screener that sorts through these companies based on investment metrics (dividend yield, market cap, etc.)
  • Find exchange-traded funds or ETF’s that track their overall industry performance and examine their current holdings.

Granted, these three methods are by no means the “be all and end all” for selecting the right companies. However, they may make things a little easier for getting started. Just beware that each strategy has its advantages and disadvantage. It is important to be able to see that and then buy or sell so that your investments are safeguarded.