The person who starts investing is at a crossroads. He needs to choose the right stock from many options. Especially when it comes to the US market. There is a huge amount of securities on it and each one “screams” about choosing her. There are similar difficulties in the Russian market. Therefore, the newly minted investor has a question about how to choose stocks correctly?
1. Define your time and purpose
To formulate your own strategy and plan, ask yourself what and when you want to get income. Clearly define the time span. Year, Five, Ten Years, or Retirement Milestone.
The stock of which companies you should choose depends on the choice of target. Understand how much you can take risks. Stocks that predict high returns are at greatest risk. The closer your goal, the less risk you must take.
The goals are as follows: an apartment in the capital worth 30 million rubles. by 2030, passive income of 50 thousand rubles. by 2035, a decent pension by 2055.
Only after the formation of a personal goal can you understand how to choose the right stock.
2. Choose between dividends and maximum growth
If the goal is passive income, then the choice should be dividend companies that pay them stably, increase their volume and do not stop paying for a long period of time (dividend aristocrats). When choosing such shares, you will have a stable and increasing cash flow..
Dividends can be reinvested, thereby increasing investment.
If the goal is to maximize capital, give preference to companies whose shares are growing rapidly in price from year to year. Sometimes, the cost grows by tens of percent, but at the same time companies do not pay big dividends or they are not at all. This approach helps them increase their market value and growth..
So, all stocks can be divided into two large camps: dividend stocks or stocks with an increase in the value increase.
3. Find out the stability, advantages and composition of the company’s business
• Stability of work. The company is constantly increasing profits, product sales, increasing market share, which means it is a serious investment target. An important factor is a unique competitive advantage or, as Warren Buffett says, “a ditch with water”. This is the moat that protects the company and leads it into leaders..
• Composition of the business. What do you do when you choose drinking yogurt? 9 out of 10 will answer to watch the composition. Then, for the price. After they determine the price / quality ratio and buy. And also with the business in which you are going to invest.
If everything is simple with the composition of yogurt, then it is more complicated with business.
1. An ideal company is one in which net profit, revenue and dividends have been growing for 5 years, and liabilities and debts have been declining. There are few such companies and the price of their shares is high, but you must know them.
2. In addition to the ideal option, there are intermediate ones. If you find a company whose profit, revenue, capital and debt are growing, then this is not a big deal. Here is a growing business that is capturing the market and is ready to take loans for this..
3. And if you find a company that does not have dividends, debts grow, revenue and net profit decrease, then you have an example of an ineffective business.
View company reporting here finviz.com (only foreign stocks) or here conomy.ru.
4. Lean towards stocks of undervalued companies
An important point on how to choose stocks. If the company has a high ratio – capitalization / net profit (P / E multiplier), then this means that it is overvalued by the market.
Multiplier P / E allows you to evaluate the real attractiveness of the company, not paying attention to emotions. A reasonable investor loves this indicator. It demonstrates how quickly the company will pay off..
For example, now Netflix P / E has an indicator of 159 – this means that if you buy such a business as a whole, then investments, at the moment and while maintaining this net profit, will pay off in 159 years. Now think about whether you would like to purchase Netflix and their shares? Everyone will form an answer for himself..
If the P / E multiplier has a value from 0 to 5, then the company is underestimated. If more – probably overrated.
Incredible forecasts and expectations are laid in the company’s growth, which leads to widespread hype around its securities and to an increase in value. Net income remains unchanged, while stock prices are rising. The market is overestimating this business. If you have chosen to invest in a revalued company, be prepared for stock price correction in the event of a crisis in the market.
No matter how much you love Netflix series, look at the real performance of their business, and not at the beautiful history of the brand. Cold calculation should prevail over emotions and preferences.
5. How to calculate P / E?
To assess the real value of a company, two things are needed:
P – company value or capitalization, which is calculated by the formula: the price of one share multiplied by their number. This is the amount for which you can buy the whole company (the value of the entire business). Capitalization data (for Russian companies) is available on the Moscow Exchange website. As an example, we give a link to indicators Tatneft [TATN].
E – the company’s net profit for the year or quarter. This information can be found on the corporate disclosure center website. e-disclosure.ru (all public companies are obliged to publish their results there) or on the website of the company itself (as a rule, this is the “information for investor” section). Investors need reporting to know net profit IFRS (International Financial Reporting Standards). Specifically, two of its forms:
• First – report on the financial position of the company.
• The second – income statement.
There you will find total debt, equity, revenue and profit, and you will already be able to understand how to choose the right stock and how attractive a company is..
The P / E animator is a good animator and one of the most popular, but you must remember that this is not a solution to all problems. The reason is the different focus of the business, the payback period and the stages of the life cycle of companies. It is impossible to equal the oil production business and the business in the technology sector with this multiplier. Look at other multipliers that will also help you figure out how to choose stocks..
6. Other multipliers
• Multiplier P / S – the ratio of the market price of a share to revenue per share. From zero to one is good (indicates underestimation), two are the norm. Suitable for comparing companies from the same industry and margins of one level.
• EV multiplier – the fair value of the company. It is calculated according to the following formula: market capitalization + all debt obligations? available cash.
• Multiplier EBITDA – the company’s profit before interest, taxes and depreciation. This multiplier is needed in order to understand what profit the company’s business directly brings. Does he know how to make money.
• ROE Multiplier – Profitability. On it you can judge the effectiveness of the company. It is useful for comparing companies from one business sector. If one plant has one hundred machines, and the other has forty, and at the same time their profit is the same, then the ROE of the second plant will be higher. This means that the second company is more efficient..
A smart strategy is to find the best companies by multipliers from the same industry..
Remember.
To choose the right stock you need:
1. Determine the goal, time to achieve, level of risk.
2. Choose dividends or maximum income.
3. Find out the composition and stability of the business.
4. See financial statements.
5. Search for stocks of undervalued companies.
6. Rate companies by multiples.
7. Do not compare companies from different industries.
Similar articles
- Pros and cons of ETFs before stocks, what to choose for a beginner?
Recently, ETF funds have become increasingly popular among investors. Their meaning is that they include a set of shares of several companies…
- Mistakes in investing – 17 common mistakes and 5 steps to solve them
CFA Institute (Chartered Financial Analyst) – an international organization for the certification of financial professionals – published common investment errors…
- Best industries to invest in 2018 – Top 9
Finding a profitable industry to invest in can be a good strategy if you are looking for new opportunities. But throw money on new stocks (as if…
There are several factors to consider when choosing stocks for investment. First, determine your investment goals, risk tolerance, and time horizon. Research companies, their financial health, growth potential, and competitive advantages. Analyze industry trends, market conditions, and news affecting the stock. Consider diversification and allocate funds across different sectors. Take into account a company’s valuation, earnings, and dividends. Consult with financial advisors or use online tools to assess the stocks’ performance and potential. Lastly, stay updated with market developments to make informed decisions. Any specific tips or strategies for novice investors?
For novice investors, it’s essential to start with a clear investment plan and conduct thorough research before making any decisions. Consider starting with index funds or exchange-traded funds (ETFs) to achieve instant diversification without needing to pick individual stocks. It’s also important to start small and gradually increase your investments as you gain more knowledge and confidence in the stock market. Avoid making emotional decisions and always focus on the long-term growth potential of the companies you invest in. Additionally, consider dollar-cost averaging by investing a fixed amount of money regularly instead of trying to time the market. Finally, seek advice from experienced investors or financial advisors to learn from their expertise and avoid common pitfalls in the stock market.
I am curious, what factors or strategies do seasoned investors consider when choosing stocks to invest in? Are there any key indicators or research tools you recommend for making informed decisions in the stock market? Any pointers on avoiding common pitfalls or maximizing returns? I would appreciate any insights or advice you can share on how to choose stocks correctly.
Seasoned investors consider a range of factors when choosing stocks. They assess a company’s financial health, growth potential, competitive advantage, management team, and industry trends. Key indicators they look at include earnings per share, price-to-earnings ratio, return on equity, and debt levels. Research tools like financial statements, annual reports, and analyst reports can provide valuable insights. Avoiding common pitfalls involves diversifying investments, not following hype or market fads blindly, and carrying out thorough due diligence. Maximizing returns requires a long-term perspective, disciplined investing, and regularly reviewing and adjusting one’s portfolio. It’s important to stay informed and adapt to market fluctuations.