How to Select Stocks?

Before you start, be truthful to yourself. What is your budget? We can’t talk about stock selection if you don’t even know how much you are putting aside to buy equities*.

Got an amount in mind? Make sure it’s in your hands too.

Right, so now we move on to the next step. Have you ever heard of diversification? In layman’s term it is “not putting all your eggs in one basket”. In this case, your eggs would be your money in stocks. We want to have money in a few baskets (i.e. in a few companies) so that if one company doesn’t perform, you still have your money in other companies (baskets) that are performing and giving you returns.

If you follow these steps diligently and with deep understanding, you should end up picking the right stock for yourself.

Step 1: Know your budget.

Step 2: Choose your industries.

Step 3: Choose your companies.

Step 4: Look at the fundamentals.

KNOW YOUR BUDGET

Your budget will help you narrow down your list of stocks to choose from. If you only have $1,000 to invest, there is really no point considering NASDAQ:TSLA (Tesla’s stocks) because it is priced at USD 645.33 per share as of 11 March 2020. Normally you can only buy stocks in lots of 100 shares, with a minimum of 1 lot purchase (i.e. 100 shares). With $1,000 you won’t be able to buy 100 shares of TSLA because that would have amounted to $64,533.

So now you know why it is important to know how much you have to spend.

Knowing your budget will help you avoid unnecessarily studying stocks you can’t afford.

Let’s just assume you have $5,000 to invest. Knowing this will also allow you to get a rough idea of how many stocks you can invest in. Because you know diversification is important to the survival of your money.

If you are more conservative, you might split the $5,000 between 5 stocks.
If you want to dabble in more expensive stocks, you might split the $5,000 between 3 stocks.

CHOOSE YOUR INDUSTRIES

Why? Because it is important that you choose stocks in industries that you understand and believe in.

Here are 11 major industry sectors in the market:

  1. Information Technology
  2. Healthcare
  3. Financials
  4. Consumer Staples
  5. Utilities
  6. Communication Services
  7. Industrial
  8. Energy
  9. Real Estate
  10. Materials
  11. Consumer Discretionary

Some things to consider:

  • Follow the market, be sure to know the vulnerable sectors as well as the sectors that are booming.
  • Note that Consumer Staples are rather stable. Although returns are not high, it will at least ensure (most of the time) that your stock portfolio does not only have negative returns in time of crisis.
  • Try to pick stocks from different industries to maximise the benefit of diversification.

CHOOSE YOUR COMPANIES

Yes, you can choose a few companies you have an interest in or that you feel strongly about. This is not the final list of stocks you will be picking. So go ahead and choose quite a number.

Some of the criteria you can choose from:

  • It’s a start-up that has high potential
  • The company sells products or provide services that you personally buy
  • It’s a company that you don’t know much about
  • Be sure to choose from the various sectors/industries that you have chosen in the earlier stage (above).
  • It’s a long-standing company with positive performance over the years
  • It has worldwide reach
  • It is local
  • It has multiple suppliers / strong supply chain
  • Its manufacturers operate in a few countries rather than dependent on only one country
  • The list goes on…

Be generous with your choices. Choose as many as you can. The hard work of filtering the stock you want will come in the next stage.

LOOK AT THE FUNDAMENTALS

Fundamental analysis is probably the most tedious yet most important part of stock-picking, unless you are going by way of technical analysis.

A company appearing to be doing very well on the outside could be crumbling with debt on the inside. That is why it is very important that we know what is happening in the business core. We want to invest in a company that can survive long term.

Have I mentioned that fundamental analysis involves a lot of studying?

What are some of the things we should be studying?

  • You start off by studying the 3 financial statements of EACH company
    1. Balance Sheet
    2. Profit and Loss Statement
    3. Cashflow Statement
  • You get to know the management team (their style, their health, their reliability, etc)

But What should you look for? Ok, I will cover those things in detail as I build up content for my website. Hang in there and subscribe to my newsletters so that you will get the updates.

It’s not easy, is it? That is why if you get it right, it pays a lot. Don’t give up. You’re very young. You have a lot of time to master this. Start now so you have time to make mistakes and less to lose.

Are you ready? Maybe not yet. You have to check out this market simulation and training website: How The Market Works.


New Vocabulary

Equities = stocks = shares

Fundamentals = the core of the business, usually understood in terms of P/E ratio, earnings, debt ratio, etc.

Portfolio = a collection of investments held by a person or institution

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