Over the weekend a family member and I got together for some stock speculation. We each ended up putting a few hundred dollars spread among three different stocks.
For us this was purely for fun. We each wanted to see if we could pick some winning stocks. And, truth be told our criteria for purchasing these stocks was pretty shallow.
Only after I set my account to purchase the stocks did I decide to do a more in depth research on the criteria I should be looking for when purchasing individual stocks.
While there are many different opinions on what metrics to look for there are also some commonalities. Here’s the consensus of my research.
Start With What You Know
What’s your favorite brand? What products do you use over and over? Which companies have business models that you love?
Think about all the companies and products that you and your peers use on a daily basis and can’t live without. Make a list of all the companies that really stick out to you.
Almost all professional investors agree that starting with what you know is the first step in choosing an individual stock. When you buy a stock you’re essentially buying a part of a business. What business do you want own a part of?
Look at Price and Valuation
Most retirement experts advise that individual stocks should make up an extremely small portion of your retirement portfolio. With that said it’s important to note that buying individual stocks can be a pretty big gamble.
Essentially you’re trying to buy low and sell high, that’s why it’s important to look for undervalued stocks.
One easy method to do this is to look at the P/E (price to earnings ratio). To do this simply divide the company’s share price by its net income. Anything with a P/E under 15 percent is generally considered cheap.
The actual price of the stock doesn’t matter. You can find undervalued stocks at both low and high prices.
There are many other metrics for determining if an individual stock is a good buy and you should do plenty of research to determine what metrics matter to you.
Research the Company
Next you want to look through the financial statements of the company. Look at their current debt load, balance sheets, revenue growth, and profit margin.
Also take the time to read more about the company. What’s the company’s plans for the future? Does it seem like there’s much room for growth? Is a good management team in place?
Take your time to soak up this information before purchasing a company’s stock.
Buying an individual stock is a gamble. However, performing your due diligence and properly researching the company will help you make a more informed decision. Beyond choosing a stock you’ll also need to figure out when you should sell.
Start slow. Almost every investor looks for different criteria when choosing individual stocks. You need to figure out your investing style and risk tolerance and come up with a custom plan for you.