Figuring out how to determine which stocks to invest is easier when you consider these measures of investment quality
Do you know how to determine which stocks to invest in for maximum portfolio gains? Most successful investors are content to build wealth steadily without taking enormous risks for the simple reason that this approach works far better than any other. By seeking investment quality and following sound investment principles (like our three-part Successful Investor approach), you increase your chances of finding superstar stocks that move faster than the market average.
The fundamentals of investing are the same for newcomers as they are for established, successful investors. The challenge for everybody is to stick to what works and not let investment fads, the media limelight or bad advice from a broker or advisor steer you off course.
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How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.
Discover how to determine which stocks to invest in by looking for undervalued stocks
Consider earnings, dividends and other factors in making decisions. They matter far more than short-term stock-price trends. Stock prices rise and fall. But strong dividend stocks like to ratchet their dividends upward. Even during market downturns, the last thing a well-established company wants to do is lower their dividend payouts. When times are good, strong companies will raise their dividend yield.
Here are some key factors to watch for:
Freedom from business cycles. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with resource firms and manufacturers.
Ability to profit from secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Renegotiated trade pacts and rising environmentalism are just two examples of secular trends.
Ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.
In addition to getting to know the companies you invest in, you should also get to know the industries that stocks operate in. Some industries are more volatile than others. Knowing that can alleviate anxiety and build confidence in your investments. Don’t invest in industries you’re not familiar with, and you’ll steer clear of many overvalued stocks.
Safety factors to watch for:
Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves. Minor firms, on the other hand, don’t have that power.
Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.
Freedom to serve (all) shareholders.High-quality value stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.
Diversification, investment quality, and a focus on dividends are key when you’re learning how to determine which stocks to invest in
We continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries.
Investors learning how to find the right stocks should look to tap the long-term growth that inevitably comes to well-established companies when they operate in relatively free economies. Here are the most essential elements for learning how to start investing in stocks.
Think like a portfolio manager to find top stock picks
Resist the temptation to copy prominent investors
Use technical analysis as just one tool
Look beyond a company’s share price
Focus on dividend-paying investments
Build a diversified portfolio
Practice patience with your investments
Use our three-part Successful Investor philosophy and you will find the best stocks to invest in
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
Learn how to determine which stocks to invest in with the help of financial ratios. Here’s a look at a key one—the price-sale ratio
Before you invest in a company, you need to know its financial history, how it allocates funds, and what kind of return you can expect for your investment.
One way to do this is by looking at the price-sales ratio. The price-sales ratio is one measure used to determine the value of a company’s stock. One way to use this ratio is as a comparison against other, similar companies, to estimate how well a company is performing.
The price-sales ratio (also called PSR or P/S ratio) uses the price of a company’s stock and the total of a company’s sales to indicate the value of that company’s stock. The aim is to determine if the stock is valued correctly.
Like most of these measures, the price-sales ratio should not be used exclusively to determine the value of a stock. Smart investors will use the price-sales ratio as one of many tools to evaluate a potential investment.
It will give you an idea of how healthy a company is. Likewise, the price-sales ratio can also give you some insight into how you may be able to benefit from a particular stock.
What is the biggest factor for you in determining which stocks to invest in?
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