Choosing a stock to buy is no small matter. In fact, if you’re just starting out and don’t have a portfolio yet, you may want to invest in low cost mutual funds. Individual stocks are risky, and you can stand lose a lot if you aren’t careful.
But, if you’ve already got a diversified portfolio with mutual funds and ETFs, then investing in individual stocks could round out your portfolio. But which stock should you buy? Which ones will offer the greatest reward with the lowest risk?
Stocks can be categorized into 11 different industries with hundreds or thousands of companies trading stock within each industry. Choosing one or two can be difficult at best.
Keep reading to learn how best to pick the right individual stocks to buy with the greatest chance of reward with the lowest chance of loss.
Stick to What You Know
When it comes to buying individual stocks it’s best to stick to what you know. If you are aware of trends or follow certain industries or companies then stick with those.
Do research on them and choose one that offers the best price with the highest chance of profitability. Look at the history of the company, how profitable they’ve been in the past, and plans for the future. Have their endeavors worked for them before? Will this new one?
Most of the answers to these questions you may already know depending upon how closely you follow the industry or company. The rest you can find with simple Google searches. Companies release public accounting reports quarterly or annually.
Price to Earnings Ratio
The pros typically look for undervalued stock. This means that it is trading at a lower price for each dollar the company makes. This can be seen by examining the price to earnings ratio or the P/E value.
The P/E ratio can be found with a simple Google search or can be calculated yourself. To calculate it yourself simply divide the price of the share by the company’s net income. A rating of 15 is cheap while a rating of 20 is expensive.
Comparing the P/E to other companies within the same industry will help you to buy certain stocks right now. However, just because a share is expensive doesn’t mean it isn’t worth buying and vice versa for cheap shares.
A share price may be low because the company is growing slowly over a longer period of time, whereas an expensive share price could indicate the company is about to grow and expand greatly.
Know When to Sell and Buy
This is the key to being a successful investor to buy certain stocks right now. Once you’ve decided which stock(s) you want to buy it is time to decide when the right time to buy is.
Be sure to pay close attention to the trends and the overall health of the company. Just because a stock is high today doesn’t mean it will be tomorrow or a month from now. Maybe that particular company’s share prices rise every year around this time. But fall immediately afterward. Now would not be a good time to buy.
However, if you already have shares of that company now might be a good time to sell, especially if you bought the shares when the price was low.
When it comes to selling you should have a plan for selling. Meaning each stock you own should have a limit where you don’t want it to fall below before you sell. This thresh hold should still leave you with some profit though not nearly as much if you sold while the price was at its highest. Having a plan will also keep you from selling out of panic.
Finding the Right Stocks
Finding the right stocks to buy can be intimidating and seem impossible, but it’s not as bad as it looks. The important thing to remember is to do your research before making any purchases.
Know the trends of the stock, and also how well the company is doing. Try to stick to companies and industries you know. This will help when you look at their P/E value compared to other companies in the same industry.
Don’t rely solely on the experts and their advice, but don’t get over cocky with your own abilities either. You could still stand to lose significantly if you’re not careful. But with the right information, patience, and caution you can find those stocks for you anywhere.