Stepping into the world of stocks is both an exhilarating and daunting experience. While those with an analytical bent of mind enjoy learning and growing their investments and staying aware of changing trends, others need help to latch on and make profitable decisions. To make this easier, here are some tips that can help beginners find their footing in the stock market so that they can pick stocks wisely!

There are no guarantees

If there’s one thing beginners should know before investing in the stock market, it is that nothing is guaranteed. There is no assurance that a stock will perform well, which is why one must always exercise caution when investing one’s hard-earned money.

Determine the investing goals

Next, it is important to understand that everyone has different investment goals. Based on these goals, investors can be categorized into three main categories:

Income-oriented investors

These investors are focused on buying stocks in companies that pay good dividends regularly. These are generally low-growth options that provide limited returns.

Focused on wealth preservation

As people age, their appetite for risky investments tends to decrease, and the focus shifts to wealth preservation. Investors in this category look for stable blue-chip companies that offer returns even when times are tough.

Focused on capital appreciation

Younger investors focused on capital appreciation can generally take bigger risks, investing in companies in their early growth years. When picked smartly, these investments can lead to bigger returns.

Each option requires a different investment strategy. Remember that there are no rules for investing in stocks. Whether young or old, a person’s investment strategy entirely depends on their appetite for risk and the time frame in which they want to achieve their goals. Work with these details in mind to make smart investing decisions.

Research well

Once the goals and risk appetite have been outlined, it is time to begin research. Before investing big money in a company’s stocks, one must learn the scope of its work, projected growth, and other details.

Many brokerage firms offer these as a part of research reports to their clients. This helps investors better understand the professional goals and timelines of the company, as well as their growth trajectory. However, this is not enough. Investors must also deeply dive into the company’s financials and the socio-political landscape to better gauge their expected returns. Important criteria to consider here include the company’s revenue growth, profitability, debt levels, return on equity, position in the industry, and the industry’s health.

Create a diversified portfolio

Ideally, investors must build a balanced portfolio with a mix of the abovementioned strategies. For conservative investors, putting a little money in growth stocks could be a great way of increasing their payoffs, while for high-risk investors, setting aside a little money in a blue-chip company could help offset losses. This is known as the diversification of the investment portfolio. In a diversified portfolio, money is distributed well across low- and high-yield options to maximize gains and reach one’s goals.

Look for companies one understands

When one buys a company’s stock, they become partial owners. So, understanding what the company does is crucial, as this helps one manage one’s investment better.

Assess the company’s competitive advantage

While overall profits indicate the company’s current success and position, it is not enough to promise future revenue. When looking for stocks to invest in, look for a company with a sustainable competitive advantage and durability. This can come from factors such as scale, switching costs, unique brands, intellectual property, etc., giving them a strong advantage over their competitors in the long run. For instance, with the current focus on AI and technology, investors must explore companies with AI product roadmaps or AI stocks for improved returns.

Look out for value traps

When a company faces financial difficulties or lacks growth opportunities, its stock prices may drop. This may look interesting to new investors focused on the company’s cash flow and previous performance. However, this is known as a value trap and could result in a loss. In addition to revenue and growth, investors should also consider qualitative factors, such as management’s effectiveness and potential catalysts, before investing in a stock.

Determine a fair price for the stock

After narrowing down a list of stocks, one must determine their fair market value. To evaluate this, experts use the following techniques:

Check the price-to-earnings ratio

This ratio divides the company’s share price by earnings (per share) over the last year. This method is best used for stocks of well-established companies with a steady profit history.

Analyze price-to-sales ratio

This ratio is used for growth stocks that do not have a stable history of earnings growth. When using this strategy, one must keep an eye out for new products and services that could bring in revenue and yield higher returns.

Discounted cash flow modeling

Investors can also make projections for revenue growth and profit margin of a company using available data. To determine stock value using these projections, simply discount the cash flow by the desired rate of return. Divide this by the number of shares to get individual stock value, and use this as a guide to make investment decisions.

Dividend yield
Generally, dividend yields that are above average for a stock indicate that it is trading at a good price. However, since these yields can be unsustainable, one must exercise caution when using this strategy to avoid falling into yield traps.