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A beginner’s guide to find the best stocks for investment

If you are a beginner in the stocks trade, then choosing the right company for investment may seem like the first step in building a portfolio. But experienced people say that investing in a single mutual fund is less risky compared to buying a single stock because a mutual fund tracks a group of stocks which balances the risks of each stock within itself. You should know that by buying stocks of a company, you also become a part owner of that company who should be willing to take risks involved in the finances based on the market movements. There are several strategies that you can employ to pick the most suitable stocks for you like fundamental analysis, qualitative analysis, value investing, growth investing, GARP investing, CAN SLIM, Dogs of the Dow or even technical analysis. As a beginner, you can prepare a list of at least 10 stocks to buy from which you can start narrowing down your choices. So here are a few tips including the do’s and don’ts to help you list your 10 stocks to buy.

The Do’s

  • Invest in a company that is familiar
    If you have a preference of a particular brand of clothing to wear, a favorite restaurant chain to dine at, particular maker of electronic goods, software provider, you will have a reason of your own to like them. Similarly, as a beginner always invests in a company that provides the best 10 stocks to buy that you are familiar and confident. A reputed brand with a larger portfolio reflects years of product development and marketing reduced risk because the good and underperformance compensate each other.
  • Compare the price and valuation of companies in the same industry
    The value of the stocks is measured by the stock’s price-to-earnings ratio (P/E). A company with a potential to grow will be more expensive compared to a company whose growth is lower as it is already established. Hence, a comparison of P/E of similar companies in the same industry will give a better idea on the best stocks to buy given the right balance of stability of the established company and future worth of the stocks of the company that might grow in future.
  • Evaluate and compare the company’s financial reports
    Find the top 10 companies that have a consistent financial history of profitability and good health through various sources available like the quarterly or annual reports released by all public companies, the investor relations section in the company website, etc and then buy the stocks. Identify patterns like revenue growth (the top line) and expenses control (the bottom line) which defines an expanding profit margin for the company. Also, understand the various debts owed by the company through the company’s balance sheet available through various sources. Also, try to find a dividend paying company whose increasing pattern indicates the growth in paying power of the company.
  • Perform analysis beyond crunching numbers and predicting cash flows
    Try to understand the strengths and the weakness of the company. Consider their management, their qualifications, experience in the related field of business, management philosophy, characteristics of the company’s industry segment and its growth potential with respect to the competitors, market share etc. Make sure you list top 10 companies and understand the value of investing in the stocks to buy.
  • Have a plan to sell the stocks that you have
    Once you have made a strategy to find the best stock to buy and have picked a few from a couple of companies, make a strategy to sell those stocks. Make a set of criteria for yourself which will help you choose the right time to sell. For example, reduction in a company’s dividend; drop or rise in the price to a certain point; downgrading of the stocks by analysts, etc. Having a plan for selling will help you avoid selling out of panic over a short-term move in the market. This will help you avoid panic selling or losing out a large portion of possible gains by indicating a good time for selling.

The Don’ts

  • Don’t follow the masses
    Don’t buy a stock just because everybody around you is buying it. Ensure you do a thorough study on the top 10 stocks that you can consider buying and gain profits in the future. Instead, think why and how this investment is going to benefit you, get convinced and then buy it. A lot of those investors too would have bought stocks without fully understanding their investments.
  • Don’t buy stocks only based on their costs
    As discussed above, the cheaper the stocks, it doesn’t necessarily mean slow growth and expensive stocks may not really mean growth potential. Look beyond the P/E. If the price drops, don’t rush to buy them. Instead take time to understand why, what or who has caused the price-drop, what may be the future outcome and then proceed.
  • Don’t rely too much on analyst recommendations
    Analysts may be able to throw some light on the health of business, but their recommendations will be mostly based on a combination of past experiences, assumptions and their bias for ‘buy’ ratings. This could affect the sell ratings of a particular product. Hence, be wary to not over-depend on anybody and go partially with your own research and wisdom on the top 10 stocks which you can buy.
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