How to select stocks for rational investment?

By Binomo

Jun 29, 2022

Level: Experienced

Reading time: 4 min

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A common mistake made by new investors is buying stocks rashly. Before investing in a particular company, you should analyze it — it may have accumulated a critical amount of debt or the value of its securities may be inadequately overstated.

In the article, readers will learn how to select stocks for investment based on the specifics of a company’s business and the price of assets. Also, experts will discuss the rules for distributing your budget and mention the main tips on how to pick stocks as safely as possible.

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How to choose stocks based on business specifics?

When thinking about how to select good stocks and choosing a specific company, it is worth it to familiarize yourself with what exactly the company does. Also think about why it may seem promising to traders and how risky your investments will be.

Special services that collect the most critical data can help in business analysis. They include Google Finance, Investopedia, MarketWatch, Investing, and Trading view.

To understand how to find good stocks, you should analyze the following information:

industry news on the given company;
financial statements;
changes in the global market.

You certainly need to check how much the price of assets has changed over a certain period of time (1, 3 and 5 years) and how global events such as crises or pandemics have influenced it.

How to select stocks based on stock price?

The main difference between primary and secondary markets

Another method of how to identify good stocks is to analyze the value of shares and check if they are overpriced. Multipliers will help you compare companies with each other and understand how the market evaluates their shares.

The main multiplier is the “Price to Earnings” ratio — it shows the ratio of the market value of all shares to the annual profit. The lower the value, the better. However, P/E doesn’t say anything by itself: you need to compare the value of competing companies. Let’s imagine that:

Company 1 has a P/E of 8;
Company 2 has a P/E of 6;
Company 3 has a P/E of about 15.

And if you are thinking about how to decide what stocks to buy, turn your attention to Company 2 — its shares will pay off faster than others’, and it’s time to think about investing in this brand. Additionally, you can explore other parameters such as P/S (price to sales), P/B (price to book), EV (enterprise value), EPS (earnings per share), and so on.

How much to invest?

If you have already decided how to choose shares to buy, don’t forget about the correct budget distribution. You can start earning even with a small initial investment. For the success of your investments, you should use the well-known 50/30/20 rule, where:

50% is half of the budget, which is spent on basic needs, utility bills, groceries, regular expenses;
30% is the part of the budget intended for random purchases;
20% is the part of the budget that is saved & used for investment.

This distribution will allow you not to limit yourself and not reduce the quality of your lifestyle, while regularly allocating money to purchase assets.

How to find best stocks to invest: simple tips

If we analyze the most popular stock-picking strategies, we can see some general hits:

beginners should start by buying shares of the largest companies on the stock market, as they are typically the most reliable;
an investment portfolio should be reviewed and updated at least once a quarter;
be sure to set financial goals to balance your portfolio;
don`t buy a huge number of shares at once, up to 20 should be enough to start.

Thus, in order to know how to check which share to buy, it is enough to analyze the company’s business and compare the value of its shares using special financial parameters. This approach will allow you to make a rational choice and get the most out of your investments.

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