Where to start to choose a stock for investing ?

If you are type of person who prefers to invest on their own rather than choosing a portfolio manager then I am sure you have encountered with a general problem. Where to start to invest?

There are more than 2800 and 3100 companies traded in NYSE and NASDAQ alone respectively and like everyone else I was scratching my head where to begin. Probably, some people attend events and are advised about companies they should look at, others follow CNBC, Bloomberg (my advice, don’t) to get tips. I have done none of the mentioned. Therefore, I will share with you how I approached the case.

Rule #1: Choose a sector/industry you understand.

First thing first in my opinion is not start to search for particular stocks based on some strategy you have got but sectors and industries. If you can work it out what sector and industry you are gonna look at first, then you can delve into more deeper.

My advice when it comes to choose a particular sector is to focus on the industry you are familiar with or experience you have got in. That will give you a big edge . Say, if you are in oil and gas , try to look at energy sector. For example, I don’t know much about health care therefore, companies in that sector becomes the last one I would consider if I have to. I focus on companies I know, how they operate, function, what shenanigans they might use etc. Warren Buffet for instance stays out of tech stocks as he does not like owning companies he does not understand.

Rule #2 : Choose your investing strategy.

You have to choose before investing what kind of investing strategy you will follow. Mostly investors choose either Value investing or Growth investing. There are a lot of nice  articles explaining each of them if you do not have prior knowledge, just Google. Your investment strategy will define the stocks you are gonna look into. If you want to follow Buffet way then go for value investing. Research has also shown value investing has outperformed growth stocks in the long run with some exceptions. I will put the link down below. I personally look for undervalued stocks – hence following value investing but everyone has different strategies so you should prioritize yours as well.

Rule #3: Choose a company size.

This is not as essential as previous rules, however, it may narrow down your scope for companies. Large, Med or small- cap stocks. Each type of them have its own characteristics. After choosing your sector/industry and investment strategy it might help you to target a particular type of companies. If you don’t find a company worth to invest you can move on to another size companies.

Aside from those rules, you should know what your investment horizon will be and should also closely monitor other fundamentals going on in the market. For example, you might have a good experience in energy sector and decide to start from oil and gas industry, however, market outlook for oil is not good for the foreseeable future which is the most important factor for energy companies or factors like seasonality plays a major role for many industries. In that case, it is better to switch the sector next you are comfortable with. Me personally would go for consumer goods or services rather than health care or information technology which I don’t know much about.

So, to sum up this is what you need :

Sector + investing strategy + company size/investment horizon (optional) + analysis of fundamental factors.

I hope this will help you to decide where to begin. If you have any questions just post down below and I will be happy to answer. ( also, any comments – good or bad ) .

Link for performance of value and growth stocks :

http://eurosharelab.com/newsletter-archive/value-vs-glamour-stocks-value-wins-hands-down/

Notice: I strongly recommend you to choose investment strategy you are comfortable with. The link above is for educational purposes only not a recommendation.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s