Choosing the right company to invest in may seem like a primary step to build a portfolio, but financial advisors say that a newbie investor should not actually start with individual stocks. If you are beginning to build your investment portfolio, buying a single stock is a lot riskier than buying a low-cost mutual fund that tracks a huge group of stocks, and it is expected that you will see sudden, sharp changes in the value of your investment if you own only a few stocks.
If you already have a diversified portfolio of ETFs and mutual funds, then you probably want to add in a few individual stocks. With the risk of an individual stock, there is also the potential for greater returns: the S&P 500 gained just 0.75% from 2006 through 2010, while in the same duration Apple’s stock hiked more than 348%.
Remember that when you buy a stock, you become a part owner of that organization. The value of your investment depends on the well-being of the company. Here’s more on how to choose a stock:
- Buy what you know
Begin with an industry or a company that you are aware of. Avoid the buildup. Many investors buy stocks without completely understanding how those companies made the money.
- Consider price and valuation
Investors usually look for stocks that are “unrecognized” or “cheap”. In general, what they mean is that investors are paying a comparatively low price for each dollar the business earns. This is measured by the stock’s P/E ratio (Price-to-Earnings). Normally, a P/E below around 15 is considered cheap and a P/E above 20 is considered expensive. Remember, cheap is not always good. When choosing a stock, determine the type of stock you are considering. An organization that is expected to grow fast will be costlier than an established organization that is growing more slowly. Compare P/E of two companies in the same industry to know if it’s expensive or cheaper than its peers.
- Assess financial condition
Make it a point to go through the company’s financial reports. All public companies release reports quarterly and annually. Going through the most recent reports is not enough; you must look for a consistent history of financial health and profitability. Look for revenue growth as well as bottom line. Also, check the company’s balance sheet to know how much debt the company has.
By keeping above points in mind and assessing your stocks according to above mentioned points you can easily make profit in share market. To know more about share market, feel free to contact us.
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